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Ottogi (007310 KS ) Poised for Sustainable Growth

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Ottogi (007310 KS ) Poised for Sustainable Growth Ottogi (007310 KS ) Poised for sustainable growth Food & beverage Three reasons why sustainable growth is possible 1) Ongoing ownership restructuring: In response to market questions over Ottogi’s Earnings Preview profit-sharing ratios, the company has been merging with its affiliates and turning April 9, 2019 some into consolidated subsidiaries. In 2017, the company merged with Ottogi Samhwa Foods and converted Ottogi SF and Ottogi Logistics Service into consolidated subsidiaries by increasing its stakes. In 2018, the company made Ottogi Oil (vegetable oil manufacturer; 2017 revenue of W76.9bn and net profit of W6.8bn; stake increased from 29% in 2017 to 52.3% in 2018) into a consolidated subsidiary and also merged (Maintain) Buy with Sangmi Foods Holdings (condiments manufacturer; 2017 revenue of W105.8bn and net profit of W4.3bn) and Poonglim P&P Holdings (packaging firm ; 2017 revenue of W57bn and net profit of W3.6bn). Target Price (12M, W) 960,000 In 2019-20, we believe Ottogi could turn its equity-method affiliates Ottogi Ramen (instant noodle maker; 2018 revenue of W645.9bn and operating profit of W29bn; Share Price (04/09/19, W) 740,000 stake increased from 24.7% at end-2017 to 27.65% at end-2018) and Choheung (food additives maker; 2018 revenue of W168. 1bn and operating profit of W11.4bn; stake Expected Return 30% increased from 33.55% at end-2017 to 44.89% at end-2018) into consolidated subsidiaries. If so, this would have several positive effects, including: 1) revenue and operating profit growth; 2) easing of market doubts over the company’s ownership structure; and 3) increased dividends. OP (19F, Wbn) 172 Consensus OP (19F, Wbn) 164 2) Potential shift to profit-oriented strategy in instant noodles: Ottogi’s instant noodle market share based on value increased from 13.4% in 2012 to 23% in 2017-18. EPS Growth (19F, %) -18.3 However, market share based on volume was around 26-28% in 2017-18, suggesting the company has a lower ASP than its competitors. From 2014 to 2018, Ottogi focused Market EPS Growth (19F, %) -13.7 on gaining share through new product releases and aggressive pricing. In 2019-20, we P/E (19F, x) 19.7 think the company, facing a lack of new product ideas and consumer fatigue with new Market P/E (19F, x) 11.6 products, may shift its focus from market share to profitability (2018 instant noodle OP KOSPI 2,213.56 margin was 4.6%). Market Cap (Wbn) 2,668 3) Pricing power: Ottogi has a robust sales force, diversified distribution channels, and a dominant market position in areas like curry, ketchup, mayonnaise, “three-minute ” Shares Outstanding (mn) 4 series, retort food, and HMR, which allows the company to pass on higher raw material Free Float (%) 34.0 prices (soybean, raw sugar, flour, etc.) and SG&A expenses (labor, logistics, etc.) to Foreign Ownership (%) 17.2 consumers. The price of Jin Ramen has not been raised since 2008, and its actual price is around 60-80% of Shin Ramen’s. If raw material prices rise, we think the company Beta (12M) 0.03 will be able to reflect the increase in its product prices. 52-Week Low 653,000 52-Week High 890,000 1Q19 preview: Robust earnings expected For 1Q19, we forecast Ottogi to post an 8.9% YoY increase in revenue and a 13.8% YoY (%) 1M 6M 12M gain in operating profit, supported by: 1) stronger sales of noodles (instant noodles, Absolute -2.8 5.4 -4.4 starch noodles, etc.), rice (cooked rice, pre-washed rice, etc.), and condiments (ketchup, Relative -6.1 7.3 5.6 mayonnaise, etc.); 2) stable raw material prices; 3) price hikes in processed food; and 4) the merger/consolidation of three subsidiaries. 130 Ottogi KOSPI 120 Maintain Buy and TP of W960,000 110 We believe that Ottogi’s pricing power, ability to weather challenges, robust 100 distribution channels, strong sales force, cost competitiveness, market dominance, and 90 sound balance sheet make it well-positioned for sustainable growth, which we view as the most important factor when it comes to F&B stocks. Once its ownership 80 restructuring is complete, the company could also increase its dividends. We 70 3.18 7.18 11.18 3.19 recommend a buy-and-hold strategy over the long term. Mirae Asset Daewoo Co., Ltd. [ F&B ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 2,011 2,126 2,247 2,419 2,512 2,623 Woon -mok Baek +822 -3774 -1679 OP (Wbn) 143 146 152 172 187 202 [email protected] OP margin (%) 7.1 6.9 6.8 7.1 7.4 7.7 NP (Wbn) 138 131 160 135 145 160 EPS (W) 39,977 38,161 45,925 37,517 40,198 44,372 ROE (%) 13.9 12.3 13.9 10.7 10.5 10.6 P/E (x) 16.6 21.1 15.8 19.7 18.4 16.7 P/B (x) 2.2 2.4 1.8 1.7 1.6 1.5 Dividend yield (%) 1.0 0.9 1.0 1.1 1.1 1.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates April 9, 2019 Ottogi Table 1. 1Q19 preview (Wbn, %) 1Q19F Growth 1Q18 4Q18 Mirae Asset Consensus YoY QoQ Daewoo Revenue 577.3 564.6 628.7 605.7 8.9 11.4 Operating profit 38.5 34.3 43.9 41.9 13.8 28.0 Pretax profit 41.6 35.3 45.9 41.7 10.2 29.8 Net profit 30.3 17.8 34.0 39.7 12.0 90.5 OP margin 6.7 6.1 7.0 6.9 - - Net margin 5.3 3.2 5.4 6.6 - - Source: Company data, Quantiwise, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %) 18 19F 17 18 19F 1Q 2Q 3Q 4Q 1QF 2QF 3QF 4QF Annual Annual Annual Revenue 577 525 580 565 629 571 634 584 2,126 2,247 2,419 Operating profit 39 39 40 34 44 45 48 35 146 152 172 Pretax profit 42 46 79 35 46 47 51 37 180 202 182 Net profit 30 33 79 18 34 35 38 28 131 160 135 OP margin 6.7 7.3 7.0 6.1 7.0 7.9 7.6 6.0 6.9 6.8 7.1 Net margin 5.3 6.3 13.6 3.2 5.4 6.2 6.0 4.8 6.2 7.1 5.6 Revenue growth 8.5 2.3 2.7 9.3 8.9 8.8 9.4 3.5 5.7 5.7 7.6 OP growth 28.5 -7.2 -9.0 13.6 13.8 17.3 19.4 2.6 2.5 3.9 13.7 Pretax profit growth 1.0 0.6 25.3 16.6 10.2 2.4 -34.8 5.9 -1.7 12.0 -9.9 Net profit growth -6.4 -7.2 68.3 8.4 12.0 6.3 -51.5 56.7 -4.5 21.8 -15.4 Source: Company data, Mirae Asset Daewoo Research estimates Table 3. 2019-20 earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 19F 20F 19F 20F 19F 20F Revenue 2,339 2,505 2,419 2,512 3.4 0.3 Merger/consolidation of three Operating profit 160 182 172 187 8.1 2.6 subsidiaries Pretax profit 179 192 182 198 1.7 3.2 Stable raw material prices Net profit 133 140 135 145 1.7 3.5 OP margin 6.8 7.3 7.1 7.4 - - Net margin 5.7 5.6 5.6 5.8 - - Source: Company data, Mirae Asset Daewoo Research estimates Figure 1. Share price performance of major processed food Figure 2. P/E of major processed food companies companies (18.1=100) (x) 170 Ottogi Dongwon F&B 50 19F 20F CJCJ Nestle Haitian-A 150 40 130 30 110 20 오뚜기 90 10 70 0 18.1 18.4 18.7 18.10 19.1 19.4 Ottogi Donwon F&B CJCJ NESTLE Haitian-A Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 April 9, 2019 Ottogi Figure 3. Market share (by value) of 3 domestic ramen Figure 4. Domestic ramen CPI trend companies (%) (%) (15=100) (%) 70 Nongshim (L) Ottogi (R) Samyang Foods (R) 30 110 Ramen CPI (L) YoY (R) 16 100 65 25 12 90 60 20 8 80 55 15 4 70 0 50 10 60 45 5 50 -4 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 00 02 04 06 08 10 12 14 16 18 Source: aT FIS, Mirae Asset Daewoo Research Source: KOSIS, Mirae Asset Daewoo Research Figure 6. Price difference between Shin Ramyun and Jin Figure 5. Domestic major ramen prices Ramen (W/unit) (W/unit) (W/unit) 900 Nongshim Shin Ramyun 900 Shin Ramyun-Jin Ramen (R) 120 Ottogi Jin Ramen Nongshim Shin Ramyun (L) Samyang Foods Samyang Ramen Ottogi Jin Ramen (L) 800 800 90 700 700 60 600 600 30 500 500 0 400 400 -30 00 03 06 09 12 15 18 00 03 06 09 12 15 18 Source: Company data , Mirae Asset Daewoo Research Source: Company data , Mirae Asset Daewoo Research Figure 8. International prices of the Ottogi’s key raw Figure 7.
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