Analysis

Analysis of Ajinomoto (M) Bhd

Dear Readers

In the last 11 trading days, the shares of Ajinomoto (M) Bhd (“Ajinomoto“) took a nosedive from an average price of RM26 (24.08.2017) to an average price of RM19 (13.09.2017). That is an average RM7 drop in share price. Percentage-wise, that is close to a 27% loss.

In my personal view, the negative movement in the share price was caused by:

  1. an adjustment to the share price as the dividend and special dividend, to the tune of RM1.55, went ex on 30.08.2017; and
  2. a widespread selloff in a cascading manner.

There were high volumes of transactions at that time during which RM400 million was wiped off from Ajinomoto’s market capitalisation.

Ajinomoto_logo1

For the benefit of those who are in the dark, a special dividend was approved for distribution from a one-off compensation of RM166 million. The compensation is with regard to a compulsory acquisition of a 7.58 acre land, at Jalan Kuchai Lama, KL. The land which houses one of its plants was acquired by the government for the Mass Rapid Transit Line 2 project.

Now as it seems like the dust has settled, the more fitting question to be asked is whether the shares of Ajinomoto are attractive at their current average price of RM19?

Let’s find out.

Overview

Ajinomoto is part of the Ajinomoto Group which was founded in Japan. Its principle business is the manufacturing and sale of umami seasoning. Umami is one of the basic tastes such as sweetness, saltiness, sourness and bitterness.

In Malaysia, Ajinomoto’s business can be categorised into the manufacturing and sale of:

  1. retail products; and
  2. industrial products.

Apart from the basic monosodium glutamate a.k.a. MSG seasoning (AJI-NO-MOTO), Ajinomoto’s retail products have branched out to include chicken stock (TUMIX), instant seasoning of various local dishes (SERI-AJI), pepper (AJI-SHIO), sweetener (Pal Sweet), blended garlic and onion-based seasoning (AJI-MIX) and a premium taste enhancer (AJI-NO-MOTO Plus).

Group-retails-2017-1
Meet the Ajinomoto retail familia. Credit: Ajinomoto

Its industrial products consist of TENCHO which encompass a range of industrial food ingredients used in the food processing industry such as noodles, sauces, processed food and etc.

Apart from the Malaysian market, which accounts for 60% of Ajinomoto’s sales, other sources of revenue come from overseas markets such as the Middle East (14%) and Asian (24.8%), among others.

During the FYE 2017, Ajinomoto’s retail business contributed RM305.3 million (73%) to its revenue whilst its industrial business contributed a cool RM114.6 million (27%).

Resilience 

Ajinomoto is a well-known for its umani seasoning since it was first marketed in Japan in 1909.

In Malaysia, Ajinomoto has become a household name since 1961 due to its aggressive television marketing in the past. Further, the use of umani seasoning is deeply entrenched and synonymous with Asian-styled cooking. The versatility of umani seasoning meant that it can be incorporated into a variety of ethnic cooking including Indian and Malay.

Through its leading market share and strong branding in the local scene, Ajinomoto’s products gets an unparalleled competitive edge over rivals.

Being a staple consumer product means that it has enjoyed steady sales even during economic downturns and the same will stay true in the future.

Potentials

Ajinomoto plans to introduce a new segment in its business which may entail the manufacturing and importing of food products as part of its plan to diversify beyond the seasoning products line. It wants to emulate what its counterpart in Thailand is doing; by selling food products and food seasoning. If indeed so, there is a likelihood that Ajinomoto may be producing or importing 3-in-1 coffee sachet, canned coffee and instant noodle. However there is nothing concrete to this regard yet.

The company also intends to boost sales in the Middle East as it sees potential in that market, especially in Saudi Arabia, Jordan, Oman and Yemen. Ajinomoto’s product which are produced in Malaysia has a better chance of penetrating the Islamic market.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 419917 400200 340376 345351 332908
OPERATING PROFIT (RM’000) 211469 53941 40596 37596 28085
PROFIT (RM’000) 187462 40787 29733 28041 19403
SHAREHOLDERS’ EQUITY (RM’000) 474638 307813 279524 262077 244344
DEBT (RM’000) 57800 59240 53422 45942 50060

RATIO

DEBT TO EQUITY RATIO 0.12 0.19 0.19 0.18 0.21
OCF RATIO 1.20 1.26 0.92 1.27 0.76
OPERATING PROFIT MARGIN 0.50 0.13 0.12 0.11 0.08
PROFIT MARGIN 0.45 0.10 0.09 0.08 0.06
EPS (CENTS) 308.30 67.10 48.90 46.10 31.90
EPS (ADJUSTED) CENTS 308.30 67.10 48.90 46.10 31.90
DPS CENTS 0.00 33.80 20.00 18.50 20.00
DIVIDEND PAY OUT (%) 0.00 50.40 40.90 40.10 62.50
P/E 5.16 13.40 12.90 11.10 13.90
ROE 39.50 13.25 10.64 10.70 7.94

With the exception of FY2017, there is a steady growth of earnings from FY2013 to FY2016. FY2017 is a little tricky though as there was a one-off gain, of RM166 million, from the said compensation. Generally a one-off gain would be discarded when valuing the fair value of a company; Ajinomoto is no different.

Of the RM166 million, only about RM144 million was recognised as profit. This can be seen in Ajinomoto’s Q4 FY2017 income statement and it’s Annual Report for FY2017.

By discarding the RM144 million from profit, Ajinomoto made only about RM42 million of profit or an EPS of about RM0.70 for FY2017.

Hence, between FY2013 and FY2017, earnings progressed at the a compound annual growth rate of about 17%. Impressive!

Other praiseworthy qualities are its low debts, good cash flow, improving profit margins and improving business efficiency. Dividend was erratic throughout the years but on the plus side the payout was on the modest side, with the exception of FY2017.

Conclusion

Even if Ajinomoto could sustain its current high growth rate in the foreseeable future, its average price of RM19 per share is, unfortunately, well above its fair value. My calculation of Ajinomoto’s fair value is about RM11.

Before I am accused of ruffling feathers, I would like to fortify my opinion that Ajinomoto is a company with solid fundamentals. Further it has a commendable economic moat in that its core MSG products are resilient from competition and economic downturns.

However, my only concern is that, at the price of RM19, there is a higher risk of a downside than an upside. Hence, a potential investor, contemplating purchasing at RM19 per share, is left with no margin of safety should things take a turn for the worse.

Having good fundamentals should not only be the sole consideration of whether a company is worth buying. This is because those fundamentals may change as time passes. To ensure that you are well protected from any adverse change in the fundamentals of the company, you must deploy a safety net in the form of a margin of safety. That means becoming a part-owner of the company for a sum lesser than its fair value.

While I am not suggesting that Ajinomoto’s share price will likely to decrease to a level near to RM11 over time (in fact it, at the time of writing on 13.09.2017, Ajinomoto’s shares are massively oversold, and may even rebound), I suggest putting Ajinomoto to your watchlist and only contemplating purchasing its shares are priced favourably in the future.

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Disclaimer

This analysis is published for your casual and leisurely reading and is not a recommendation to buy, sell or hold shares and must not be relied upon as a financial advice. You are encouraged to seek your own financial advice.

Reference
  1. Q4 FY2017 report
  2. FY2017 Annual Report
  3. http://www.ajinomoto.com.my
  4. http://www.thestar.com.my/business/business-news/2016/12/22/ajinomoto-accepts-rm166mil-compensation-award-for-land/
  5. http://www.thestar.com.my/business/business-news/2016/11/30/dividend-windfall/
  6. http://www.theedgemarkets.com/article/ajinomoto-diversify-product-offering
  7. http://www.theedgemarkets.com/article/ajinomoto-venture-food-products
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