Food and Bio Businesses Going Strong amid the Reopening
The author is an analyst of Shinhan Investment Corp. He can be reached at sanghoonpure.cho@shinhan.com. – Ed.
2Q22 earnings to come in line with consensus estimates
CJ CheilJedang is expected to have generated operating profit of KRW454.5bn (-3.2% YoY) on sales of KRW6.97tr (+10.5% YoY) for 2Q22, coming in line with consensus estimates. Excluding CJ Logistics, sales and operating profit should have come in at KRW4.22tr (+12.5% YoY) and KRW345.4bn (-9.1% YoY), respectively. Earnings look decent despite cost burdens and a high YoY base. The food division likely saw operating profit jump 9% on the back of strong sales of processed foods at home and abroad, price hikes, and efforts to improve efficiency in marketing spend. Operating profit of Schwan’s should have surged by 48% on robust sales of new products and price hikes. The bio division seems to have done well considering the high base of a year ago, with operating profit falling just 5% owing to ASP hikes and market share gains. Operating profit of the feed and care division likely tumbled by 65% hit by a drop in Vietnamese hog prices and rising costs.
Food and bio businesses going strong amid the reopening
We forecast food and bio businesses to continue to deliver strong performance despite rising costs and high base effect. The food division has been able to pass on cost increases to consumers through price hikes and work on raising cost efficiency. Sales from food service channels are recently on the rise with the easing of social distancing, but the company will focus on retail channels with high growth potential, such as B2B, online, and convenience stores (CVS). In addition, the penetration rate of Mandu products in US stores is climbing at a fast pace. The company has sought to raise its penetration rate for the past two years, and now the focus will be on increasing sales in stores and launching other Korean food products. The bio division is facing a downtrend in Chinese amino acid prices, but should be able to reduce earnings volatility caused by changes in amino acid market conditions compared to the past, and improve margins by expanding the portion of high-margin products.
Retain BUY for a target price of KRW530,000
We retain our BUY rating on CJ CheilJedang for a target price of KRW530,000. The food division continues to achieve top-line growth, driven by a structural increase in demand for ready meals, price hikes, and overseas growth. Profitability is also on an uptrend with closure of unprofitable channels and lower market competition in general. The bio division has diversified its product portfolio to address earnings depressed by supply surplus since 2011. The market for specialty amino acids including White Bio is still small in size, but a high entry barrier keeps competition at low levels. Hence, the bio business is maintaining decent levels of growth and profitability, and is seen positive from an ESG (environmental, social, governance) perspective. Cost burdens from grain price hikes, which should continue until the end of the year, have already been priced in at current share price levels. CJ CheilJedang shares are currently trading at a 12-month forward PER of 7x. We believe the stock is grossly undervalued given ample growth momentum.