Potential for Domestic Ramyeon Price Hikes in 4Q22
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Maintain BUY, target price of KRW360,000
We maintain BUY on Nongshim and our TP of KRW360,000. 2Q22 earnings should miss the market consensus on growing raw material/logistics costs. However, we forecast the cost burden to ease from 2H22 as prices for raw and intermediary materials, such as palm oil and PP film, stabilize (3-6 month lag vs. spot prices) and steady growth in ramyeon demand fuels revenue growth at home/abroad. Furthermore, a higher COGS ratio justifies product price hikes, so we expect OP to increase YoY from 4Q22. As such, we leave 2023E-24E OP mostly unchanged.
2Q22 forecast: OP of KRW6.0bn (-65.3% YoY) well below market consensus
We forecast 2Q22 consolidated revenue at KRW734.1bn (+13.3% YoY, -0.3% QoQ) and OP at KRW6.0bn (-65.3% YoY, -82.5% QoQ; 0.8% OPM), which is well below the KRW18.5bn consensus. Top-line growth should continue, supported by:
(1) robust ramyeon demand at home/abroad amid firming popularity of Korean ramyeon and growing inflation and
(2) price markups at overseas subsidiaries. That said, OPM should erode significantly on a growing cost burden (e.g., higher grain/logistics prices), a trend that we believe will continue into 3Q22.
Domestic operations: Growing cost burden plus off-peak seasonality
In terms of domestic operations, we believe top-line growth will be sustained in 2Q22 on snack price hikes and robust ramyeon demand as inflation convinces more people to dine-in. However, OPM should slide significantly to 0.5% (-1.1p YoY) on spiking raw material prices (e.g., flour, palm oil) and increases in intermediary material prices (e.g., PP film). Also, 2Qs are typically the off-season, as wage hikes begin to be booked from June.
Overseas operations: Cost burden intensifies despite ramyeon price hikes
While overseas top-line growth should continue thanks to steady increases in ramyeon demand and price hikes, we believe the uptick in raw/intermediary material prices and growing logistics costs are unlikely to have been fully passed through to product prices. As for the Chinese subsidiary, profitability should be maintained in 2Q22 on robust demand despite a logistics bottleneck caused by China’s lockdown.
Potential for domestic ramyeon price hikes in 4Q22
Domestic consumers are highly sensitive to ramyeon prices, but price hikes may be warranted if there is an earnings shock in 2Q22. Specifically, we see potential for domestic ramyeon price hikes and YoY OP growth in 4Q22.