The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com. — Ed.
We expect to see a slowdown at the domestic processed food and bio businesses. However, even when taking this into account, we view the stock as being excessively undervalued, trading at a record-low P/E of 7.4x.
Excessively undervalued even given near-term earnings slowdown
We maintain a Buy rating and TP of W540,000 on CJCJ.
Unlike competing F&B stocks, which have recently risen sharply on expectations of margin spread expansion, CJCJ’s shares have performed relatively sluggishly, due to: 1) concerns over a drop in profitability at the bio division; and 2) the possibility of a slowdown in processed food demand following price hikes. We lower our 4Q22 and 2023 estimates in reflection of this, but maintain our TP amid adjustments to peer group multiples.
Even considering the slowdown in short-term earnings momentum, the stock is currently trading at a P/E of 7.4x, which we believe is excessively undervalued. The record-low valuation (excluding when the Covid-19 pandemic first hit) is more than 20% below than the industry average (9.6x). From an earnings point of view, we believe that now is a good time to increase exposure to the firm.
4Q22 preview: Lower expectations
We forecast consolidated 4Q22 sales of W7,725.6bn (+11% y-y) and OP of W307.1bn (+30% y-y). While significant y-y growth is expected following one-off performance bonus payments last year, earnings are likely to fall short of consensus.
At the food division, delayed negotiations on unit supply price with some retailers such as Coupang and Lotte are likely to have a temporary negative impact on domestic processed food sales. However, we do not expect this issue to be prolonged, and as overseas sales, led by the US, are still showing high growth, a gradual recovery is expected.
The bio business is experiencing unfavorable conditions, such as falling amino acid prices. As such, a short-term decline in OPM is inevitable. The company’s ability to protect its profitability by increasing the proportion of specialty products will act as an important variable for its share price.
