EUR 850.00 For Business Accounts Only

Morningstar | Profits Came In Significantly Lower Despite the Expected Miss; Shares Overvalued

Narrow-moat Yamazaki Baking’s second-quarter profits came in significantly below our expectation and the company’s target, although we had projected the company to miss its guidance. The disappointing profit result is attributable to increased logistic costs of the bakery food business, as well as a slowdown in top-line growth. While the company has maintained its full-year guidance, we find the guidance, implying 60% growth during the second half, fairly challenging. Given the price hikes of some core bakery products, equivalent to roughly 12% of group sales, we have maintained our forecasts and our fair value estimate of JPY 2,300. As we highlighted in our previous note discussing the impacts of price hikes, we think the market has factored in continuous price hikes, which seem unlikely under the current operating environment, and we see the share price as overvalued. Our fair value estimate indicates 17% downside.

Sales were flat year on year in the second quarter, while operating profits fell 15%, caused mainly by growth deceleration in many bakery products, in addition to a sales decline across the majority of subsidiaries. The same-store sales decline in major C-store customers, including Lawson and FamilyMart, has apparently depressed demand for bread. Sales of Chip Star, a line of stacked potato chip products, were hurt after rivals regained shelf space as the issue of the potato shortage was resolved. Given that Chip Star is a major contributor to Yamazaki Biscuits’ sales and profits and the impact will last until early autumn, a strong rebound in Yamazaki Biscuits’ profits seems less likely. Likewise, the firm struggles to increase sales of other biscuit products, despite its efforts to expand the product lineup, as it fails to gain shelf space, especially at the C-store channel. While gross margins fell by more than 20 basis points, this was in part due to increased depreciation for the new Kobe factory.

The retail business, mainly the Daily Yamazaki C-store chain, saw a marginal 0.4% decline in same-store sales during the quarter. The product renewal of rice balls, a key ready-to-eat item at C-stores, has apparently boosted store sales. While losses have narrowed, the business may stay in the red for another year, given fierce competition in the C-store market.

Management is pinning its hopes on the price hikes implemented in July and the other chance to gain shelf space for biscuit products in the autumn, when retailers change their product offerings. While we expect the price hikes of the moaty bakery products will be fully passed on, the estimated JPY 2.5 billion in additional profits contributed by the price hikes is unlikely to make up the shortfall without acceleration in sales growth. However, the scenario of sales acceleration seems less likely to happen, as we expect the price hikes to depress volume in the first six months following the price hikes.