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Morningstar | Nissin's Price Hike a Positive Surprise, but Benefits Fully Priced In

Narrow-moat Nissin’s third-quarter core profits (gross profits less SG&A) trended slightly ahead our expectation, with sales up 2.4% (like for like 3.7%) and profits down 7.3% (LFL 6.4%). The announcement of 4%-8% price hikes on domestic Nissin instant noodles was a positive surprise as management denied the possibility at the first-half result briefing. We expect price hikes on the moaty Nissin brand will take about a year to kick in and have lifted our profit forecasts by 4-5% from fiscal 2020. We accordingly raise our fair value estimate to JPY 7,300 from JPY 7,100. We view the shares as fairly valued as they shot up nearly 9% after the announcement. History suggests that part of the price hike benefits will be offset by either volume declines or increased volume rebates in addition to rising costs.

It appears that the targeted products represent roughly 80% of Nissin’s domestic sales and the average price hike is about 6% (4%-8%). We expect rival Toyo Suisan to follow suit and estimate that price hikes will lift core profits by about JPY 4 billion or 12%. Nissin saw margin contraction during the last price hike in January 2015 with a similar sales scale and price increase. We anticipate that Nissin will increase promotional spending/rebates to smooth the impact on volume as it did in 2015. Food manufacturers whose margins have been squeezed by soaring input costs, particularly packaging, and surging logistic costs in Japan are rushing to pass on higher costs ahead of coming sales tax hikes (food products exempt from tax hikes). Unlike the rush of price hikes in 2015 when economy was recovering, a less promising outlook indicates a risk of downtrading or more profound impacts on volume, which could curtail manufacturers' efforts to raise prices. While private labels are excluded from this round of price hikes, we think management may review the possibility after having better visibility on volume impacts on the targeted products.

Despite the warm weather, the moaty domestic instant noodle business managed to maintain sales, although cost inflation combined with increased depreciation expenses associated with commencement of the new factory depressed profits, leading to a 10.5% decline in business profits (4% decline excluding depreciation impacts). Rising costs in the United States and Brazil also dragged on profits with the region seeing a 63% LFL decline in profits. Nissin expects the price hikes that took place in Brazil in mid-November to curb the profit decline, and price negotiation with the major retailers in the U.S. will kick in during the fourth quarter and reverse the loss-making trend.