Goldman Sachs Upgrades Ajinomoto Target Price to 6500 Yen, Positive on ABF Material Demand

Overview

This report is issued by Goldman Sachs, updating on Japanese integrated food manufacturer Ajinomoto (2802.T). The core view of the report is to maintain a 'Buy' rating and significantly raise the 12-month target price from 5150 Yen to 6500 Yen. This adjustment primarily reflects the institutional technology team's latest assessment of strong demand in the semiconductor industry, particularly an optimistic outlook for demand for Ajinomoto's core product ABF (Ajinomoto Build-up Film), a key insulating material for semiconductor packaging substrates. The report upgraded the company's earnings forecasts for the next three years and increased valuation multiples, believing its high growth and improved profitability are sufficient to support valuations higher than historical averages.

Core views

Earnings Forecast Upgrade and Growth Drivers: Goldman Sachs upgraded Ajinomoto's operating profit forecasts for FY2027-2029 by 1.4%, 4.2% and 6.2% respectively. This adjustment mainly stems from the upgrade of sales expectations for the Functional Materials business (mostly ABF). The institution expects the CAGR of this business sales to reach 27% over the next three years, far exceeding the average growth rate of 5.4% of the company's overall food and beverage segment. With the proportion of high-profit functional materials business rising, it is expected that its contribution rate to the company's total operating profit will increase from the current 24% to 32% in FY2028. ABF Business Outlook and Market Position: Ajinomoto holds more than 95% of the global market share in the ABF field, with customers including major substrate manufacturers such as Ibiden and Unimicron. Although downstream substrate manufacturers (such as Ibiden) expect higher sales growth rates (40%-46%), considering that the raw material costs of ABF itself have not risen sharply like other substrate materials (such as T-glass, copper foil), and the unit price increase brought about by ABF technological upgrades will continue to contribute revenue, Goldman Sachs believes that the volume growth of Ajinomoto's functional materials business is not the only driver, and unit price increase is also an important factor. It is expected that the operating profit ratio of the functional materials business in FY2028 will reach 32%. Valuation Logic Reconstruction: Given that the semiconductor industry is in the early stage of a historical major cycle, the Goldman Sachs technology team moved the valuation baseline year from FY2027 to FY2028. For Ajinomoto, the valuation baseline was also adjusted from an average of FY2027-2028 to a single fiscal year of FY2028. At the same time, the target EV/NOPAT multiple was raised from 27.5 times to 31 times. Although the industry average multiple dropped to 19 times, based on ROE correlation analysis, Goldman Sachs gave Ajinomoto a 61% premium relative to the industry average (average level of the past 12 months). The implied FY2028 P/E is 37 times, higher than the average of 30 times in the past three years, but considering that the FY2028 operating profit CAGR over the next 3-5 years is as high as 17% and ROE continues to improve, this valuation is considered reasonable.

Analysis framework

Goldman Sachs' analytical approach follows a methodology combining top-down sector sentiment judgment with bottom-up fundamental company verification. First, relying on the internal technology team's macro judgment that the semiconductor cycle is in the early recovery stage, a tone of strong demand for upstream key materials like ABF was established. Second, by comparing growth expectations of downstream customers (e.g., Ibiden) with Ajinomoto's own cost structure, the revenue drivers for the functional materials business (volume vs. price) were broken down in detail. Finally, at the valuation level, relative valuation methods (EV/NOPAT) were adopted, introducing a dynamic adjustment mechanism: not only moving the valuation baseline year with the industry cycle, but also dynamically adjusting the premium proportion relative to industry averages based on the company's ROE performance, thereby more accurately reflecting its value during the high-growth period.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  EV/NOPAT Multiple Valuation

  The research report uses enterprise value to net operating profit after tax (EV/NOPAT) multiples for valuation. This is a valuation method that excludes capital structure and tax impacts, focusing on core operating profitability, commonly used for comparing companies with heavy assets or significant capital structure changes. In this report, analysts dynamically adjust the premium of this multiple relative to industry averages based on ROE performance.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Industry Chain Transmission

  Upstream-Downstream Growth Difference and Cost Transmission Analysis

  Analysts compared the growth expectation differences between upstream material suppliers (Ajinomoto) and downstream substrate manufacturers (Ibiden) and analyzed the transmission of raw material costs within the industry chain. This method helps identify profit distribution changes and pricing power ownership among different links in the industry chain.

• Cycle and Sentiment FrameworkSentiment Tipping Point Analysis

  Judgment on Early Stage of Semiconductor Cycle

  The research report adjusted the valuation baseline year based on the judgment that the semiconductor industry is in the 'early stage of one of the largest historical cycles'. This reflects the logic in cyclical stock investment of 'giving higher long-term valuation weight in the early stage of the cycle', as the certainty of growth in the early stage often increases over time.

• Competition and Strategy FrameworkMoat / competitive advantage

  Monopoly Market Share and Pricing Power

  Emphasizes Ajinomoto's global market share of over 95% in the ABF field, viewing it as a core competitive advantage (moat). This monopoly status grants the company extremely strong pricing power, allowing it to maintain high profit margins when raw material costs fluctuate and increase unit prices through product function upgrades.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Ajinomoto (2802.T)

  Direct beneficiary. As a global monopoly supplier of ABF insulating films, it directly benefits from the recovery of semiconductor packaging substrate demand.

  Strengths

  ABF global market share exceeds 95%, extremely strong pricing power; High profit margins (functional materials business margin exceeds 50%); ROE continuously improving.

  Weaknesses

  Traditional food business growth relatively slow; Valuation multiples already at historical highs.

  Comparison

  Compared to pure food peers, possesses a unique high-growth engine in semiconductor materials; Compared to pure semiconductor material companies, possesses a stable cash flow base provided by the food business.

  Risks

  ABF demand below expectations; Semiconductor cycle reversal; Healthcare business environment deterioration.

Key data

• 12-Month Target Price6500 YenUpgraded from 5150 Yen, implying 12.7% upside
• Operating Profit Forecast Upgrade Magnitude+1.4% / +4.2% / +6.2%Corresponding to FY2027/FY2028/FY2029 respectively
• Functional Materials Business Sales CAGR27%Expected for next three years, main driver is ABF
• Overall Operating Profit CAGR17%Expected for next three years, far higher than the average 5.4% of the food and beverage segment
• Target EV/NOPAT Multiple31xUpgraded from 27.5x, with 61% premium relative to industry average of 19x
• ABF Global Market Share>95%Reflects extremely strong market dominance and pricing power
• 2028E ROE24.1%Expected to continue rising, supporting valuation premium

Impact & implications

The report believes that Ajinomoto is no longer just a traditional food company; its high-growth, high-profit semiconductor materials business is reshaping the company's valuation logic. As ABF demand explodes with the semiconductor cycle recovery, the company's overall profit structure will tilt towards high-value-added materials, bringing more stable profit improvement and higher ROE. For investors, this means referring more to the valuation system of tech material stocks rather than traditional food stocks. Especially during the semiconductor up-cycle, Ajinomoto possesses significant alpha yield potential.

Risks

• Decrease in sales volume, average selling price (ASP), and ABF demand
• Deterioration in healthcare business environment

What to watch

• Progress of semiconductor industry recovery and ABF substrate shipment volumes
• Unit price increase capability and sales volume growth matching for functional materials business
• Whether the trend of company ROE improvement continues