Supply Falls Short of Demand
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
1Q20 earnings surprise with consolidated OP of KRW63.6bn (+101.1% YoY)
Nongshim posted consolidated operating profit of KRW63.6bn (+101.1% YoY) for 1Q20, an earnings surprise that exceeds the market’s heightened expectations by more than 20%. Growth was driven by solid sales of ramyeon (+22.3% YoY) and snacks (+13.0% YoY). Consolidated sales came in at KRW687.7bn (+16.8% YoY). Domestic sales expanded 14.1% YoY and overseas sales from China, Japan, the US, and Canada jumped by more than 30% on average. The COGS and SG&A ratios fell by 2.3%p and 1.5%pYoY, respectively, thanks to lower fixed cost burden on sales growth.
Earnings improvement to continue in 2Q20 with consolidated OP of KRW34.4bn (+319.6% YoY)
Earnings improvement should continue in 2Q. Consolidated operating profit is forecast to rise by more than KRW20bn YoY to KRW34.4bn, bolstered by declines in the COGS and SG&A ratios on sales growth. We expect the COGS ratio to decrease by 2.5%p YoY and the SG&A ratio by 1.3%p YoY. Supply falls short of demand. Overseas sales will likely continue to increase given soaring demand for food products in 2Q. Overseas sales should grow 20.7% YoY. Domestic sales of ramyeon and snacks are estimated to go up 14.2% and 12.9% YoY, respectively.
Retain BUY and raise target price by 15.8% to KRW440,000
We raise our target price for Nongshim by 15.8% to KRW440,000 based on our earnings forecast revision. We remain unconcerned over short-term earnings, as the company enjoys a virtuous circle of sales growth leading to reduced fixed cost burden. Despite the recent share price rally, valuations do not seem burdensome at the current share price. Continuing improvement in earnings should justify valuation levels. With the outlook brighter for short-term earnings, we retain our BUY rating on Nongshim.