Mid/long-term Growth Momentum Gaining Steam
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Valuation re-rating factors such as HMR growth, overseas sales growth, and online channel expansion are all emerging for the sector. However, even without reflecting valuation premiums, TPs for F&B players are being boosted by earnings surprises.
Mid/long-term growth momentum gaining steam
We maintain a Positive stance towards the F&B sector. Continuing to recommend CJCJ as our sector top pick, we also suggest Orion, Nongshim, Samyang Foods, and Pulmuone as companies well-situated to enjoy overseas growth momentum. We also like Dongwon F&B, Maeil Dairies, and Lotte Chilsung in light of valuation merit—although their earnings have been somewhat temporarily dampened by Covid-19, we view these firms’ shares as currently being undervalued in light of their solid fundamentals.
We do not believe that recent trends in the F&B sector will be short-lived. Rather, we believe that these trends will be here to stay, boosting mid/long-term growth engines for the industry. Since the Covid-19 outbreak, we have been seeing greater: 1) home meal replacement (HMR) consumption; 2) online channel expansion; and 3) overseas market penetration. Going forward, these changes are to translate into meaningful earnings improvement.
1Q20 review: Earnings helped by higher demand, normalized prices
In 1Q20, sales and OP for major domestic F&B players (ie, 14 companies) jumped 10.0% y-y and 22.4% y-y, respectively. In detail, while sluggish B2B sales present a concern, B2C sales growth proved larger than expected, leading overall earnings improvement. Particularly standing out is profit growth, spearheaded by maximizing of profit leverage effects—COGS-to-sales ratio and SG&A ratios narrowed 0.6%p y-y and 0.5%p y-y, respectively.
After 2Q20, product prices that once collapsed due to sales promotions should remain normal, and overseas sales are expected to increase markedly in response to rising food demand. In 2H20, we believe that valuation rerating factors will emerge, in turn helping to spur further earnings and share price climbs.