Expansion In Bio-Pharma And AI Materials Will Drive Future Success

Key Takeaways

• Growth in Bio-Pharma Services and Ingredients, driven by increasing projects, is expected to positively impact earnings and business profits.
  
• Strategic market and product expansion in Frozen Foods and premium Seasonings aim to boost revenue and profitability.
  
• Rising costs and currency pressures threaten multiple domestic business segments, necessitating price adjustments and cost management to stabilize revenue and margins.

Catalysts

Engages in the seasonings and foods, frozen foods, and healthcare and other businesses in Japan and internationally.

• The Bio-Pharma Services and Ingredients segment, especially CDMO and Forge, are expected to experience significant growth, driven by an increasing number of customers and projects. This expansion is likely to improve business profits and contribute positively to earnings.
  
• The introduction of premium products in the Seasonings and Foods segment, such as high value-added items in Japan and Thailand, aims to increase unit prices and sales volume, which can enhance revenue and profitability.
  
• The strategic expansion of the Frozen Foods business into new markets, such as ASEAN and South America, is expected to drive revenue growth through broader geographical coverage and increased demand for products like gyoza.
  
• Functional Materials is experiencing favorable conditions due to the growth of high-performance computing, particularly involving AI, which is positively impacting the business profit margin and driving sales growth.
  
• The ongoing cost and price adjustments in the domestic coffee business are anticipated to offset raw material price increases, which could stabilize and potentially improve net margins once cost pressures are fully absorbed.

Ajinomoto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ajinomoto's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ¥149.5 billion (and earnings per share of ¥307.49) by about March 2028, up from ¥92.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥119.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.7x on those 2028 earnings, down from 33.1x today. This future PE is greater than the current PE for the JP Food industry at 16.3x.
• Analysts expect the number of shares outstanding to decline by 2.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.59%, as per the Simply Wall St company report.

Ajinomoto Future Earnings Per Share Growth

Risks

• The domestic Frozen Food business in Japan is facing challenges with flat sales and stagnant growth, risking a potential decline in revenue if not addressed effectively.
  
• Rising raw material and logistics costs, coupled with a weak yen, are pressuring domestic food-related business operations, negatively impacting net margins unless offset by sufficient price hikes.
  
• The CDMO business, although contributing to growth, is dealing with significant negative profit contributions from Forge, leading to potential lower earnings if not mitigated.
  
• The domestic coffee business is under strain due to rising raw material costs, necessitating further price hikes that may not fully cover cost increases, impacting revenue stability.
  
• The variability in raw material costs for fermentation and coffee continues to pose a risk, possibly affecting overall profit margins if costs increase unexpectedly beyond what current price strategies can manage.

Valuation

• The analysts have a consensus price target of ¥7072.308 for Ajinomoto based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥8500.0, and the most bearish reporting a price target of just ¥5400.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1821.4 billion, earnings will come to ¥149.5 billion, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 4.6%.
• Given the current share price of ¥6116.0, the analyst price target of ¥7072.31 is 13.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.