High-base Effect to Ease in 2H21
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
In 1H21, Nongshim’s earnings will inevitably be dampened by high base effect (y-y) and raw material cost burden. However, the company’s share price momentum should be highlighted in 2H21 thanks to an easing of high-base effect, a recovery in overseas sales growth, and ASP markups.
Remains excessively undervalued vs peers
We maintain a Buy rating and TP of W415,000 on Nongshim. In 1H21, high y-y base effect (stemming from the Covid-19 outbreak) is to be in play. In addition, raw material cost uptrends are to further dampen profitability. However, in the domestic market, the firm’s market share has solidified compared to last year, and in overseas markets, its expanding client base and market share growth trends are sustaining. Nongshim’s shares are currently trading at a 12-month forward P/E of 11x, offering a 20% discount to its competitors who are losing US market share to Nongshim. We believe this discount stems from a neglect of Nongshim’s mid/long-term growth potential.
ASP hikes for ramen and snack products in the cards
If raw material costs continue to grow, chances will rise for 2H21 price markups for ramen and snack products. As ramen-related growth is somewhat stagnant in the domestic market, ASP hikes for ramen products should provide relatively greater momentum for the firm’s share price compared to markups for other types of F&B offerings. Believing that fears towards 1H21 earnings decline are priced in, we advise monitoring for share price rebound opportunities.
High-base effect to ease in 2H21
In 2H21, sales and OP should climb by a respective 5.9% y-y and 19.2% y-y. While the company is likely to continue to be burdened by strong raw material prices, margins are expected to improve as yearend approaches, helped by efforts to streamline SG&A expenses. And, sales growth will likely accelerate in overseas markets, amid an easing in y-y high base effect and a widening in consumer base.