Overseas Performance Disappointing
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Ottogi should book 2Q20 OP growth of 9.8% y-y, backed by higher sales of ramen, frozen products, and ready-to-eat foods. That said, it is disappointing that the company’s exposure to overseas markets is low at a time when global food demand is surging.
Overseas performance disappoints
We stick to a Hold rating and a TP of W635,000 for Ottogi. As Korea’s leading F&B company, Ottogi boasts stable cash flows, but earnings contributions from high-growth-potential products have been lackluster and the firm’s investment in, and exposure to, overseas markets has lagged that at rivals. Having made forays into overseas markets, Ottogi’s peers have enjoyed sustained earnings climbs in line with global food demand growth and a higher global awareness of K-food. But, Ottogi has failed to jump on this overseas growth bandwagon.
Over the mid/long term, sales and demand for Ottogi’s cash cow businesses will likely shrink, and HMR, frozen food, and ramen product competition should heat up. Given its product portfolio, Ottogi’s earnings improvement prospects look dimmer than those for its peers. In response to recent changes in largest shareholder stakes in affiliates, there are expectations towards a strengthening in EV via governance restructuring. But, it remains unclear as to when governance restructuring will unfold. Of note, Ottogi’s planned merger with Ottogi-Oil Manufacture is not to translate into a change to consolidated earnings.
Ramen sales growth to stand out in 2Q20
We estimate consolidated 2Q20 sales of W606.1bn (+6.9% y-y) and OP of W41.6bn (+9.8% y-y), with both figures meeting consensus. B2B sales likely rebounded after being hit hard by the Covid-19 crisis in 1Q20. Sales of seasonings/sauces and fatty food products are believed have remained flat y-y. Along with its peers, the company should benefit from rising food demand and easing promotions activity.
We believe that Ottogi’s ramen sales grew at a double-digit pace in 2Q20, fueled by: 1) Covid-19 effects; and 2) the launch of limited-edition ramen products in collaboration with a TV program. The firm’s sales of frozen food and ready-to-eat food items likely remained sound, as well.