Ajinomoto Earnings: Functional Material and Biopharma Weakness Offsets Price-Hike Benefits of Food

Narrow-moat Ajinomoto’s 2802 first-quarter results, with sales up 5.6% (2.1% currency-neutral) year on year and business profits up 5.7% (2.1%), were mixed but seem largely in line with the company’s internal targets. The growing price-hike benefits of the moaty food businesses, particularly in the overseas markets, were largely offset by the soft demand of the functional material, or ABF, and biopharma services businesses, the two growth drivers during the pandemic. We expect the price-hike benefits of food will peak in the second quarter. The profit outlook for fiscal 2023 will largely hinge on the timing of demand recovery of ABF in the second half. After the rally in May, we view shares, trading at an 18% premium to our fair value estimate of JPY 4,500, as overvalued. Our business profit forecast for 2023 is 3% above the guidance.

As we have stressed, sales and profits of the functional material and biopharma-services businesses are greatly influenced by industry cyclicality. Thus, rising contribution of the nonfood business-to-business segments will raise the group’s profit volatility, making the profit outlook less predictable. Given the nature of the businesses, we do not find the strength of the past three years to be durable. On the other hand, persistent domestic weakness is a concern. While the demand rebound of the foodservice channel has lifted domestic sales and profits, it appears that the retail volume remains soft. We expect a boost of marketing investment in conjunction with new product launches scheduled for the rest of the year.