EUR 850.00 For Business Accounts Only

Morningstar | Price Hikes to Drive Nissin's Profit Growth but Escalating Depreciation Expense a Burden

Narrow-moat Nissin Foods’ fourth-quarter profits came in significantly below our expectations and fell short of the initial full-year guidance by 8% excluding the impact of a JPY 9.6 billion impairment loss. Management has guided a somewhat conservative outlook for 2019 with 3% growth in the top line and a 12% growth in profits excluding the impact of impairment loss. Moreover, it has revised down its 2020 mid-term sales and profit targets by 13% and 10%, respectively, to reflect overseas shortfall. While our profit estimates are 10% above the 2019 guidance and 5% above the revised midterm target, we made no change in our forecasts as we expect the profitability of the moaty domestic instant noodles business will improve on the back of price hikes. Additionally, management has not factored in growth in China because the listed entity of the China business does not provide a guidance. Nevertheless, we intend to revisit our numbers after obtaining more details from management.

The impairment write-down of the U.S. and Brazil assets and downward revision of the 2020 mid-term plan echo our argument that the market was overly optimistic about Nissin’s growth prospect abroad. After a 10% correction over the past weeks, we view Nissin’s shares as fairly valued. Shares are trading in line with our fair value estimate of JPY 7,300.

Fourth-quarter business profits (gross profits – SG&A) plunged 56% despite a 2.8% growth in sales. Gross margins contracted by 260 basis points as a result of continued input cost inflation, mainly for ingredients of instant noodles sold in Japan. A sizable increase in depreciation expenses associated with the new domestic factory further weighed on profits. On the other hand, the U.S. business turned profitable during the quarter after the price hikes kicked in. A healthy growth in Brazil and Mexico also contributed to profit growth in the region.

Improved profitability in Americas, along with domestic price hikes and top-line growth, will continue driving profit growth in 2019. On the other hand, the soaring depreciation expenses will depress the group’s profits by about JPY 7 billion.

Management also confirmed that C-stores’ initiative to reduce inventory return of instant noodles would have little impact on its profits as Nissin has been able to resell returned products without a loss.

Contrary to a 20% dividend hike in 2018, management has maintained the annual dividend at JPY 110, implying a payout ratio of 44%. It may hike dividends if profits trend ahead of its target under the condition of a stable dividend policy.