Ajinomoto Earnings: Raising Fair Value on CDMO Growth Potential; Guidance Appears Achievable

We are raising our fair value estimate for narrow-moat Ajinomoto 2802 to JPY 4,500 per share from JPY 3,500 to reflect the growing strength of the biopharma service business led by CDMO—contract development and manufacturing organization—expansion. We anticipate the increasing number of long-term contacts will shore up growth. Management’s guidance of 11% business profit growth for fiscal 2023 (ending March 2024) looks feasible if customers’ inventory adjustment for servers ends soon. Restoring profitability of the domestic moaty food business through volume growth and price hikes will be a priority. Although the target seems challenging, we think Ajinomoto’s moat, underpinned by its brand equity and product development capability, will help regain share and lift margins; this was recently evidenced in the profit surge of the struggling U.S. frozen food business. Nevertheless, we view the shares as modestly overvalued, indicating 7% downside to our new intrinsic value.

Fiscal fourth-quarter results came above our forecasts as a leap in profits at the U.S. frozen food business offset weakness in the functional materials business, ABF. As we anticipated, the economic slowdown in the United States depressed server demand, which led to a nearly 15% decline year on year (estimated to be more than 20% at currency-neutral rates) in ABF sales during the fourth quarter. In contrast, the U.S. frozen food business saw losses narrow greatly to nearly breakeven as price hike benefits continued to kick in while improved operational efficiencies contributed to cost reduction. Likewise, profits at the overseas seasoning and processed food business also rose considerably, lifted by price hikes and recovery of the foodservice channels, while domestic unit profits continued to slip, with the decline widening quarter on quarter. The inflation has forced some consumers to trade down to private label or buy less as a result of cuts in grocery spending.