Agflation Concerns to Weaken
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Grain prices to ride gradual downcycle; agflation concerns to weaken
Global asset markets have witnessed a sizable shift since 2H20 due to global agflation concerns stemming from a sustained grain price uptrend. We note that the grain price uptrend is a result of: 1) La Niña, which has a negative impact on grain sowing, crop yields, and harvests; and 2) the weak dollar.
However, we predict that agflation fears will gradually disappear in the asset markets. For the time being, still-tight inventories of last year’s harvests should support elevated grain prices. But, with climate factors having faded since May 2021, anticipation for new harvest expansion and a strong dollar trend have paused the grain price upcycle. Moreover, high grain prices have led to a slowdown of China’s grain imports and a decline in global biofuel demand. Weighing all of the above-mentioned factors, we forecast that global grain prices will gradually decline and stabilize going forward.
Once F&B product prices go up, they rarely come down
Typically, higher commodity prices put downward pressure on margins at F&B firms, but if they pass on increased costs to customers, their operating leverage expands. In general, price cycles proceed as follows: supply-demand imbalance →rise in speculative demand →price upsurge→supplier/supply increase →price decline. The F&B sector, however, sets itself apart from others in that once F&B product prices go up, they rarely comedown, and upon a decline in commodity prices, F&B plays’ margins often improve remarkably as a result. Accordingly, price hikes benefit F&B plays over the long term.
High-base effect to vanish from 3Q21
High-base effect (y-y) should vanish from 3Q21 in the F&B sector. Panic buying caused by the pandemic proved very strong in 2Q20, and through 3Q20, cost burden remained low amid decreased raw material costs. But, stockpiling demand has since weakened while cost burden has increased. Accordingly, high-base effect, in terms of both top-line and bottom-line, should linger only until 3Q21. As we predict that raw material prices will turn to decline overall from 4Q21, most F&B players should enjoy price markup effects in earnest this year. Meanwhile, a steady increase in household food consumption and market share recovery at major F&B plays should lead to margin improvement.
Top picks: CJCJ and Orion
We recommend making investments centering on CJCJ and Orion. As for CJCJ, despite delivering an earnings surprise in 2Q21 and showing improved fundamentals by division, its share price has corrected significantly. At Orion, sluggish 1H21 earnings are almost coming to an end. Given such, both plays look solidly undervalued. In a similar sense, we expect Nongshim to show an earnings recovery from 2H21 through next year after hitting a low in 2Q21. Lotte Chilsung is set to display markedly strong y-y earnings growth.