In Need of Mid/long-term Growth Momentum
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
For 1Q21, Ottogi is expected to report consensus-missing results. Ramen and canned fish sales likely showed negative growth due to y-y high base effect, with OP shrinking y-y owing to greater raw material cost burden. We believe that the firm needs to find new growth drivers via product portfolio diversification and greater overseas expansion efforts.
In need of mid/long-term growth momentum
We maintain a Hold rating and TP of W635,000 on Ottogi, believing that the firm is in need of product portfolio diversification that could strengthen its mid/long-term growth prospects. While demand for its cash-cow products (sauce/seasoning and fats/oils) surged in 2020 thanks to Covid-19, demand is to contract over the mid/long term. Given such, we believe that the company’s current product portfolio offers limited room for earnings growth. In addition, Ottogi lags behind competitors in terms of overseas expansion efforts.
That said, we draw attention to possible product price hikes in response to rising raw material prices. We believe Ottogi’s market competitiveness within the sector will strengthen through ramen product price hikes and governance structure improvements on the merger of its ramen-related affiliates.
1Q21 earnings dampened by raw material price burden
In 1Q21, Ottogi likely posted consolidated sales of W647.6bn (+0.3% y-y)and OP of W49.2bn (-14.1% y-y), with OP sapped by increasing raw material price burden.
But, we believe that fat/oil products sustained double-digit growth thanks to effects from capacity expansion and the recovery in B2Bsales. The dried food unit, meanwhile, likely maintained sound sales growth on the back of strong sales for curry products. We also anticipate sales growth of 40% y-y or higher for cooked rice products, thanks to shifting food consumption trends.
But, high base effect (y-y) is expected for some products that enjoyed an upsurge in demand last year, with sales of ramen and canned fish products likely declining at a double-digit pace.