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Morningstar | Growth in Nissin's Moaty Domestic Instant Noodles Steady; Cost Inflation Weighs on Overseas Profits

Narrow-moat Nissin Foods' second-quarter sales and core business profits (gross profits – SG&A) trended largely in line with our expectations, with sales up 1.8% and core profits down 6.5% year on year. Despite a tough comparison hurdle, the moaty domestic instant noodle business managed to maintain margins amid cost inflation while rising costs in the U.S. and Brazil along with adverse movement of the Brazilian real depressed profits. We expect profits to rebound in the second half when price hikes in Brazil and the U.S. kick in. We made no change in our forecasts but lifted our fair value estimate to JPY 7,100 from JPY 6,950 to reflect the increased time value of money. We view the shares as fairly valued.

Sales grew by low to midsingle digits across the business segments except for the Americas where a 20% devaluation in the Brazilian real wiped out sales growth. A more than 80-basis-point contraction in gross margins is attributable to raw material cost inflation and a less favorable geographic mix with increased overseas contribution.

Sales of the domestic instant noodles remain healthy with a 1.7% growth, boosted by a double-digit growth in Nissin’s noodles in bags. Nissin has managed to maintain its operating margins of the domestic instant noodles as sales growth, along with lowered marketing spend and administrative expenses offset the impacts of raw material inflation, rising logistic costs, and increased costs associated with the new factory in West Japan.

On the other hand, input cost inflation and rising logistics costs continue to weigh on profits in the U.S. and Brazil. It has hiked prices in Brazil again in November following an average 4% price hike in April to pass on higher costs. Meanwhile, the U.S. business continued suffering a loss as negotiation with key retailers to raise prices takes time. Brazil posted a low-teens like-for-like growth in sales thanks to high-single-digit growth in volume in addition to a 4% price hike.

A mid-single-digit growth in sales in China is lifted by a high-single-digit growth in Mainland China. It appears that price competition initiated by Chinese rivals has subsided. On the other hand, a low-single-digit growth in Hong Kong was largely contributed by increased trade volume of the wholesale business. Profit growth rebounded to a 14% growth after the impacts of increased depreciation of the new factory and costs associated with IPO cycled. However, higher personnel costs are likely to depress profit growth, leaving profit (excluding the non-recurring items) flat year on year.