The author is an analyst at NH Investment & Securities. She can be reached at firstname.lastname@example.org. -- Ed.
CJCJ’s 4Q19 OP beat consensus by 36%. It is positive that the firm’s balance sheet improved and its profit rebounded. Considering the company’s earnings rebound and likely overseas growth in 2020, we believe that the stock is undervalued.
▶Sustainable turnaround begins
Maintaining a Buy rating and raising our TP by 6% to W360,000, we continue to recommend CJCJ as our sector top pick. Our SOTP-derived TP equates to a P/E of 11x. It is positive that the company’s financial structure and profitability have quickly improved after it announced management reorganization in 3Q19.
Earnings should improve at all divisions in 2020, including: 1) post-restructuring profit growth at the processed food division; 2) increased margins at the bio division thanks to expanding sales of high-margin products; and 3) an earnings turnaround at the feed division. In addition, earnings growth should sustain in the US. Noting these positives, we view the stock as being undervalued, trading at the bottom of its historical band.
▶4Q19 earnings surprise
Excluding the logistics division, CJCJ registered 4Q19 sales of W3.33tn (+25.4% y-y), OP of W172.1bn (+65.2% y-y), and NP of W49.1bn (TTP, +W85.5bn y-y). Consolidated OP (including logistics division) beat consensus by 36%, marking an earnings surprise.
Thanks to improved promotion expense efficiency and the advance reflection of Lunar New Year holiday effects, OPM at the processed food division rose 1.4%p y-y, despite SKU restructuring-related losses (approximately W3bn). The bio division’s OPM jumped 3.6%p y-y, led by the expansion of the high-margin food additive market and cost reductions. The feed division contributed to the company’s overall margins thanks to a sharp profit improvement (OPM of 9.5% (+5.4%p y-y)), led by a surge in pork prices in Vietnam (+32% y-y, +93% q-q) and lower raw materials prices in Indonesia.
Excluding the logistics division, net borrowings slid W2.1tn to W4.8tn from W6.9tn in 3Q19. The balance sheet improvement was driven by the sale of idle assets (including property in Gayang-dong (W850bn), a factory in Yeongdeungpo (W230bn), and the firm’s HR building (W52bn)) and an expansion in funding from external sources at overseas subsidiaries.