CJ CheilJedang
The author is an analyst of Shinhan Securities. He can be reached at sanghoonpure.cho@shinhan.com -- Ed.
1Q23 OP likely to miss consensus at KRW298.3bn (-31.5% YoY)
We now expect CJ CheilJedang to post operating profit of KRW298.3bn (- 31.5% YoY) on sales of KRW7.18tr (+2.8% YoY) for 1Q23, missing the consensus estimate by 12%. Excluding CJ Logistics, sales and operating profit should come in at KRW4.46tr (+3.2% YoY) and KRW205.4bn (-43.7% YoY), respectively. As in 4Q22, the continuing cost burden likely caused earnings to fall short across the board, aside from overseas food sales. Food division sales should have inched up by just 5.5% YoY with weak sales volume adding to consumer fatigue from price hikes. Operating profit from the division likely dropped by 8% YoY due to the continuing cost burden. Operating profit from Schwan’s, however, is expected to have increased by 9% YoY on market share gains and brisk sales of mainstay products.
Meanwhile, we believe bio operating profit dropped 58% YoY, weighed down by market weakness, heavy cost burden, and high YoY base. Feed & care earnings likely remained in the red as in 4Q22 due to cost increases.
Concerns over decline in processed food sales to dissipate
Signs of changes in consumer spending amid the recent economic slowdown are raising concerns over a downtrend in sales volume of CJ CheilJedang's products due to their relatively higher price tags. However, we believe the company’s long-standing brand power will remain a competitive advantage in these highly uncertain times. In addition, the price competitiveness of processed foods has recently improved thanks to the steeper increase in dining-out expenses. CJ CheilJedang, in efforts to deal with sluggish sales, has launched reasonably-priced products to encourage consumers to opt for eating-in over dining-out. Moreover, given that the decline in sales volume following price hikes typically continued for three quarters in the past, we expect processed food sales to recover to normal levels from 2Q23.
Target price revised down by 9% to KRW430,000
We lower our target price for CJ CheilJedang by 9% to KRW430,000 to reflect the slower-than-expected recovery in bio market conditions as well as the continuing cost burden. However, we retain our BUY rating with near-term earnings weakness already priced in, ample growth potential and profitability added from the food division, and specialty amino acids to drive earnings growth beyond the high YoY base for the bio division. Going forward, the company plans to focus on developing new growth engines, such as future food ingredients, nutrition and alternative/cultured proteins, through its newly-established food & nutrition tech division. Upon confirmation of steadier earnings from existing businesses and operational synergy with new businesses, we plan to remove the 30% discounts placed on the valuation of CJ CheilJedang's business divisions vs. global peers.