Morningstar | Degree of Downward Revision Greater Than Expected, but Yamazaki Baking Passing the Worst. See Updated Analyst Note from 30 Oct 2018
Narrow-moat Yamazaki Baking saw profit decline widened in the third quarter with flat sales and a 38% decline in profits. While we had expected a downward revision, the 23% cut in operating profits is greater than our expectation. We have slashed our 2018 profit forecasts by 16% and 8% for the rest of the five-year explicit forecast period, and lowered our fair value of estimate to JPY 2,100 from JPY 2,300. The shares have corrected by 27% over the last three months and are now fairly valued. While we expect profits to rebound in 2019 given a low comparison hurdle and benefits of price hikes, its profit growth beyond 2019 is likely to remain marginal unless management takes a drastic measure to improve its logistic efficiency.Third-quarter sales were flat year on year despite a 3.8% price hike on 70 bakery products, equivalent to roughly 12% of the group’s sales, implemented on 1 July. The unprecedented heat wave depressed demand for bakery products through mid-September while increased fixed costs associated with the new Kobe factory and rising logistics and energy costs further weighed on profits. Product mix deteriorated given a 1.4% decline in sales of the higher-margin bread loafs and sweet buns compared with a 3%-4% growth in sales of sandwiches and western sweets. Yet, we think the company should have passed the worst as sales of the core bakery products turned positive after temperatures returned to normal.
It appears that the the shortfall by the third quarter makes up the majority of the JPY 8.1 billion downward revision in operating profits, and about JPY 5 billion is caused by the weak bakery sales largely due to the unfavorable hot weather. The monthly trend and data of volume and pricing indicate that the price hike was passed through from August, rather than July, as rivals delayed the timing of their price hikes, and there are no notable impacts of price hikes on sales volume.
It turned out that sales of some products with price increases saw volume increase while sales of the products without price hikes experienced a sizable decline. Moreover, sales of bread loafs and sweet buns turned flat in September compared with a 2%-3% decline in July and August.
We thus expect a recovery in bakery sales in 2019 and expect the price hikes fully kick in. We project sales rebound, combined with the contributions of the price hikes and reduced fixed costs associated with the 70-year anniversary and Kobe factory will boost operating profits by roughly JPY 5 billion. While we anticipate sales of Yamazaki Biscuit will gradually improve as a tough comparison for Chip Star’s sales is cycled, the C-store sales are likely to remain sluggish given intensified competition in the food retailing industry.
Yamazaki Baking is a baking company. Co. is engaged in the manufacture of bread, Japanese and western confectionery and the sale of its products to retailers; the manufacture and sale of bakery products; the operation of bakery cafes and bakeries; and the manufacture and sale of sandwiches, packed meals, rice balls, Japanese crackers, snacks and rice crackers. Co. is also engaged in the operation of convenience stores and food supermarkets; the logistics business; the design, supervision and construction of food manufacturing facilities; the office work entrusted business; the non-life insurance agency business; and the manufacture and sale of cleaning agents for baking equipment.
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