Food and Parcel Delivery Demand Growing
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
Initiate coverage with BUY for a target price of KRW380,000
We initiate coverage of CJ CheilJedang at BUY for a target price of KRW380,000. Investment points are: 1) earnings growth across the company's diversified business portfolio; and 2) relatively attractive share valuations. In detail, strong earnings should be driven by surging demand for the food division, low YoY base for the bio business, and steeper increase in parcel delivery volume vs. decline in contract logistics orders for the logistics division. Our target PER of 18.9x represents a 25% discount to the past five-year average PER after factoring out one-off gains, and is similar to the past five-year average PER before removing one-offs (19.4x).
2020 growth outlook: Sales +6.5% YoY, OP +11.8% YoY
For full-year 2020, we expect sales and operating profit to grow 6.5% and 11.8% YoY, respectively. Total food sales will likely increase 9.1% YoY to KRW8.74tr. Processed food sales should rise 12.7% YoY, but foodstuff (flour, sugar, etc.) sales will likely fall 3.7% YoY with the downtrend continuing from 2018. After recording a double-digit decline in 2019 due to the African swine fever outbreak, bio sales are expected to climb 3.6% YoY in 2020 backed by the low YoY base of 2H19 and stronger demand from 2Q20 on turnaround expectations. Logistics sales are projected to jump 6.3% YoY on strong demand for parcel delivery services.
Focus on: 1) food and parcel delivery demand growth, 2) cost ratio improvement, 3) low base effect for bio business
Key points to keep an eye on include: 1) earnings growth on rising demand for foods and parcel delivery services; 2) potential improvement in cost ratios for the food industry as a whole on downward stabilization of oil and grain prices; and 3) low base effect for the bio division. After recording a sharp upturn in 1Q20, food demand is expected to stabilize going forward.
The food division (including Schwan’s) should see sales grow 39.6% YoY in 1Q20, 6.3% YoY in 2Q20, 4.4% YoY in 3Q20, and 4.1% YoY in 4Q20. We see ample room for further improvement given rising demand for home meal replacement products. In addition, the uptrend in earnings should continue, thanks to online sales growth for the parcel delivery business and 2H base effect for the bio business. All in all, we recommend CJ CheilJedang as our top pick in the food/beverage sector.