Ajinomoto Earnings: Price Hike Benefits of Food Neutralize Further Weakness of ABF and Biopharma

Narrow-moat Ajinomoto posted mixed second-quarter results, with sales up 5.6% (0.6% decline currency neutral) year on year and nearly flat business profits (5% decline). The advanced price hike benefits of the moaty food businesses, particularly in the overseas markets, offset widened profit decline of the functional material, or ABF, and biopharma services businesses, the two growth engines of the group’s profits during COVID-19. Contrary to management’s confidence in improved healthcare (ABF and biopharma service) demand from the second quarter reiterated just three months ago, the downward revision of healthcare sales and profits points to limited visibility to cyclicality and a business model depending on a few clients, the risks that we have flagged but the market seems to have overlooked. After the recent rally, we view shares, trading at 33% premium to our fair value estimate of JPY 4,500, as overvalued. Our business profit forecast for 2023 is 3% above the guidance.