A Stock of Interest

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 our coverage of Nongshim with a BUY rating and a target price of KRW380,000, based on 2020F EPS and a target PER of 20x. The target PER represents a 5% discount to the past five-year average PER (adjusted to factor out one-off expenses and profits), and is similar to the 2019 averageof20.6x reflecting one-offs. A discount was applied as it is yet to be confirmed whether the company can keep expanding its market share QoQ for 2H20 and onwards. Looking at the past two years, however, we see more upside than downside and thus hold an upbeat outlook for 2H20.

The key investment point for Nongshim is the YoY uptrend in domestic ramyeon market share, which has drivena rally in shares. The company’s ramyeon market share is estimated at mid-50% levels for 2020. It should remain stable throughout the year after a good start. Flagship products (Chapagetti, Neoguri) showed brisk sales thanks to a buzz created by the Academy Awards-winning film Parasite. Demand for food products rose sharply from February.

2020 growth outlook: Sales +8.7% YoY, OP +51.2% YoY

Nongshim is expected to have recorded consolidated sales of KRW686.6bn (+16.7% YoY) and operating profit of KRW50.1bn (+58.4% YoY) for 1Q20. By division, ramyeon sales are estimated at KRW353.2bn (+16.7% YoY), snacks KRW87.2bn (+10.2% YoY), and beverages KRW40.5bn (+17.5% YoY). Overseas sales should have increased 24.2% YoY to KRW165.4bn. For full-year 2020, we forecast sales to grow 8.7% YoY to KRW2.55tr and operating profit to jump 51.2% YoY to KRW119.2bn.

Ramyeon market share to remain stable, likely up 1.8%p YoY at year-end

Nongshim’s domestic ramyeon market share is estimated to have expanded 2.9%p YoY to 56.8% in1Q20. It is also 2.8%p higher than the 2019 average market share of 54%. The gains are attributable to Parasite marketing fervor and overall ramyeon demand growth from February. The market share should remain stable throughout the year after the hike in 1Q and reach 56.2% (+1.8%p YoY) at the year-end. Nongshim shares will likely remain steady on market share gains. Further upside in shares should hinge on the market share trend in 2H20. Nongshim is a stock of interest.

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution