Focus On Taste & Nutrition And Specialty Amino Acids Will Strengthen Product Portfolio

Key Takeaways

• Expansion into new markets and online sales is set to drive significant revenue growth and market share increase, especially in mainstream retail channels.
  
• Investment in U.S. and European manufacturing improves production efficiency, capacity, and operational margins, with strategic focus areas boosting earnings and investor appeal.
  
• Supply disruptions, rising costs, and non-operating losses threaten CJ Cheiljedang's margins, revenue growth, and market share, with strategic execution risks compounding potential financial instability.

Catalysts

Engages food and bio businesses in South Korea and internationally.

• Expansion of online sales and penetration into new markets like Southeast Asia and Europe are strategic moves that may drive significant revenue growth, particularly in mainstream retail channels. This is expected to impact the total revenue positively through increased market share.
  
• Continued investment in manufacturing capabilities, such as building new plants in the U.S. and Europe, is aimed at meeting rising global demand for key products like Mandu and Asian foods. This investment is projected to improve production efficiency and capacity, potentially enhancing both revenue and operational margins.
  
• Optimization of product mix and strategic pricing, particularly in the BIO segment with products like lysine and tryptophan, aims to take advantage of market recovery and trade conditions. This could lead to significant improvements in net margins and boost earnings.
  
• The company’s strategic focus on high-growth categories like Taste & Nutrition and Specialty Amino Acids, coupled with economic recovery initiatives in key markets like China, is anticipated to enhance EPS by diversifying and strengthening their product portfolio.
  
• Planned increase in dividends and focus on shareholder returns with a new policy aiming for a 25% payout ratio could drive positive investor sentiment, potentially increasing the valuation relative to earnings growth and dividend yield.

CJ Cheiljedang Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CJ Cheiljedang's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 2.2% in 3 years time.
• Analysts expect earnings to reach ₩703.9 billion (and earnings per share of ₩44989.55) by about March 2028, up from ₩429.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the KR Food industry at 9.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.72%, as per the Simply Wall St company report.

CJ Cheiljedang Future Earnings Per Share Growth

Risks

• High supply disruptions in the U.S. caused by events like tornadoes, along with increased fixed cost pressure and rising ingredient costs, could have adverse short-term impacts on operating margins and profitability in key markets. This might affect CJ Cheiljedang’s revenue growth and net margins.
  
• Non-operating losses, including significant impairment of tangible and intangible assets, negatively impacted net profits, recording in the negative. This poses a risk to future earnings growth and could pressure financial performance if not addressed.
  
• Competitive pressures and declines in sales or profitability in segments such as Feed & Care and BIO due to market issues such as antidumping duties in Europe and intense market competition may affect revenue and net margins, particularly with weaker segments like methionine not meeting performance expectations.
  
• Market share decline in key areas, such as Korea Food, and supply chain disruptions affecting sales in larger markets like the U.S., pose risks to maintaining revenue growth. A poor response to these challenges and continued marketing inefficiencies could lead to a decline in market presence and overall financial health.
  
• Strategic execution risks related to expansion plans and high capex requirements might affect financial stability. The execution of new plant launches and the potential shift in production to recover from impairments might require substantial capital and administrative attention, impacting net margins and earnings if not managed efficiently.

Valuation

• The analysts have a consensus price target of ₩361461.538 for CJ Cheiljedang 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 ₩410000.0, and the most bearish reporting a price target of just ₩309000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩32081.4 billion, earnings will come to ₩703.9 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 8.7%.
• Given the current share price of ₩265000.0, the analyst price target of ₩361461.54 is 26.7% 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.