EUR 850.00 For Business Accounts Only

Morningstar | No Surprise in Kikkoman's Results; Shares Overvalued With Valuations Twice of the Sector

Narrow-moat Kikkoman’s third-quarter sales and profits are in line with our expectation and the company’s internal targets. It has maintained its full-year guidance. We have marginally adjusted our assumptions, which do not affect our fair value estimate of JPY 4,000 implying a 27% downside. Kikkoman’s shares are trading at 38 times P/E and 20 times EV/EBITDA in 2019, more than twice the multiples of the Topix food sector. We suspect that either the market has priced in unrealistic growth or the stock’s relatively high weight in the Nikkei 225 index in contrast to its market cap has lifted demand for the stock. Despite Kikkoman’s stable sales and profits thanks to the characteristics of its core products and limited players in the space, its shares have priced in much more than the true fundamental growth, and we deem it overvalued. Our profit forecasts are largely in line with the consensus and slightly above the company’s guidance for 2018 and 2020 midterm plan.

A key positive development during the quarter is that the higher costs of wholesale products are on track to be passed on to customers in North America where the operating margins of the wholesale business are improving. While the market has been speculating that the dip in the U.S. soybean prices could significantly boost Kikkoman’s profits in fiscal 2019, the increased contract price of non-GMO soybeans announced recently as a result of doubled planting incentives, a markup that Japanese trading houses pay to local soybean distributors in North America, may suggest limited input cost savings for the domestic food business.

The 4.9% growth (5.7% excluding foreign exchange impacts) in third-quarter sales was lifted by a nearly 5% growth in overseas foods and more than 9% growth in overseas wholesale. On the other hand, operating profits were nearly flat, growing less than 1%, as a result of flat domestic earnings and increased headquarter expenses. Gross margins continue to contract as a result of increased contribution of the low-margin wholesale business and rising input costs for the domestic foods as well as additional overhead in Asia and Europe.

Profits of the lucrative overseas food businesses grew 4% thanks to solid growth in North American soy sauce and wholesale sales in the western markets. Growth in Europe’s soy sauce sales decelerated to low single digits due to a delay in timing of the order placement from a core corporate customer and will rebound in the fourth quarter. Likewise, a healthy growth in the high-margin soybean milk sales was a key driver behind a 1.3% growth in domestic food sales. Nevertheless, increased costs depressed profits, leaving them flat year on year. An expectation of increased depreciation and repairment expenses is likely to drag on the domestic profits during the fourth quarter.