Top Picks: CJCJ, Pulmuone, Lotte Chilsung
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
The 2021 business landscape is similar to that in 2011, just before a sector rally kicked off.
In 2011, there were concerns over deteriorating profitability due to rising grain costs. However, from 2H11, F&B industry valuations began to recover alongside ASP markups. Following that time, grain costs fell, with food players in turn enjoying profit margin widening for 2~3 years. Over 2013~2015, valuation premiums were awarded to companies benefiting from: 1) mega-hit products; 2) Chinese market expansion; and 3) HMR and/or food materials distribution ventures (amid a demographic increase in single-person households), in turn driving up sector share prices.
Given this history, with momentum lacking in 1H21, we advise monitoring for players whose share prices are set to rise in 2H21 in response to mid/long-term earnings growth engines. We view the key signs of a valuation recovery for the F&B sector as being grain cost decreases and ASP hikes. Once accompanying margin improvement becomes visible, valuation premium factors similar to those that sparked the past industry rally—ie: 1) mega brands; 2) overseas market earnings (including in China and the US); and 3) the creation of new segments (such as vegan and alternative food offerings in tune with consumption behavior change—are to emerge. Beneficiaries’ earnings and share prices should rise steadily over the next 3~5 years. We recommend CJCJ as our top pick, and Pulmuone and Lotte Chilsung as our second preferred picks.
Top pick 1: CJCJ (097950.KS); TP of W700,000
Despite y-y high-base effect, CJCJ’s earnings should continue to trend upwards in 2H21, helped by restructuring efforts at its food businesses (at home and abroad), overseas expansion, and improved bio division margins.
Despite y-y high-base effect, the firm’s earnings growth trend is likely to sustain in 2H21. Looking at the bio division, profitability is to improve on both increasing spot prices and expanding sales portions for high-margin products. Looking at its food businesses, margins at both home and abroad have been leveling up thanks to cost streamlining efforts and SKU rationalization, with raw material cost burden also easing. In addition, ASP markup momentum remains valid. Earnings continue to climb at CJCJ’s global food business on the back of product and sales channel mix improvements in China and Japan, as well as an increasing number of Korean food stores in the US. Meanwhile, having been hit hard by Covid-19, B2B demand has been recovering at Schwan’s Company since March, and is predicted to rise on a local-currency basis from 2Q21.
Top pick 2: Pulmuone (017810.KS); TP of W25,000
We remain upbeat towards Pulmuone, noting that in addition to short-term earnings momentum provided by: 1) growing sales at overseas subsidiaries; 2) recovering food service/restaurant earnings; and 3) its alternative food offerings, it also has in place mid/long-term growth engines. Overseas sales growth is expected to come under greater spotlight in 2H21, helped by an expansion in product lineups and supply to a greater number of stores.
Quarterly operating losses at the firm’s restaurant-related businesses have narrowed by W3bn y-y, a development that should offset the slowdown in domestic processed food sales. Pre-emptive ASP mark-ups for tofu/seasoned vegetable products are to help free the company from the burden of rising raw materials costs.
Pulmuone deserves a valuation premium as it stands as the only firm capable of responding to the ongoing expansion in the global plant-based protein market among domestic peers. Pulmuone’s short-term earnings improvement and mid/long-term direction are both appealing.
Top pick 3: Lotte Chilsung (005300.KS); TP of W185,000
Lotte Chilsung should continue enjoying upward earnings movement on: 1) solid new products sales and OEM production at the liquor division; and 2) channel/product diversification and ASP markups at the beverage division. The firm’s earnings momentum could further strengthen in 2H21, thanks to: 1) package extensions (hard seltzer); 2) design renewal (Kloud); and 3) wine lineup expansion.
Consensus-topping 1Q21 results confirmed strengthened fundamentals at the liquor division, and from 2Q21, liquor plant utilization is set to rise in earnest. Given the stronger-than-expected popularity of craft beer products, it is possible that a utilization rate rise on OEM beer production will exceed our expectation (+10%p). Moreover, Lotte’s liquor business is also benefiting from greater wine consumption among Koreans.
The beverage division should gradually reflect: 1) product portfolio strengthening via the launch of zero calorie cider (soda); 2) strong brand power; and 3) the diversification of distribution channels to greater include delivery and online channels. The firm’s raw materials burden has been rising, but this negative can be sufficiently offset by ASP markups. Asset value re-evaluation is likely upon the development of its Seocho property.