Bernstein upgrades Ajinomoto to Outperform, raises target price to JPY 6,700

Overview

This report is Bernstein's rating upgrade note on Ajinomoto Co Inc. The key change is that Ajinomoto's ABF semiconductor materials business is no longer growing only through product mix upgrades and the introduction of new specifications; it is now beginning to raise prices for flagship semiconductor input materials on a like-for-like, raw-material-linked basis. The report argues that this marks a shift in the company's pricing paradigm, which should lift ABF revenue growth, restore operating leverage, and expand or at least sustain Ajinomoto's fair share in the ABF substrate value chain.

Core views

The report's main views are as follows: first, downstream ABF substrate customers have already raised prices by about 15%-30%, creating room for Ajinomoto to implement like-for-like price increases; second, Bernstein factors into its forecast an about 15% increase in Al-related film prices and about 5% increase in PC/server-related prices; third, overall Business Profit growth for FY3/27-29 is expected to be 27%/24%/18%, accelerating further from 14% in FY3/26; fourth, Seasonings & Foods is expected to use brand strength and market share to more than offset raw-material pressure through price increases, while Frozen Foods, given the more fragmented industry structure and weaker historical cost pass-through ability, is still expected to see margin contraction.

Analysis framework

The analytical framework centers on upward revisions to earnings forecasts, segment-level price pass-through capability, supply-demand constraints in the ABF value chain, and valuation re-rating. The report first breaks down revenue and margin changes in ABF, Seasonings & Foods, and Frozen Foods, then cross-checks EPS forecasts against DCF, SOTP, and target P/E, and ultimately arrives at a JPY 6,700 target price based on a 35x target P/E.

Methodology notes

• Valuation methodDCF

  Discounted cash flow valuation

  The report's DCF analysis implies a target price of about JPY 6,626 and uses an 8.5% WACC and a 3.5% terminal growth rate; the WACC sensitivity range of 8.25%-8.75% corresponds to a target price of about JPY 5,900 to JPY 7,600.

• Valuation methodSOTP

  Sum-of-the-parts valuation

  The report uses SOTP to validate the target price, with a segment valuation range of about JPY 5,700 to JPY 6,700, where the re-rating of ABF comparable companies is an important source of change versus the previous SOTP.

• Valuation methodP/E

  Price-to-earnings valuation

  The report shifts its valuation expression from EV/EBITDA to P/E to improve comparability for investors; the JPY 6,700 target price corresponds to about 35.0x NTM P/E.

• Business analysisCost pass-through and over/under coverage

  Pricing pass-through capability under raw-material inflation

  The report compares the cost pass-through ability of Seasonings & Foods and Frozen Foods under raw-material cost pressure, concluding that the former can more than offset the pressure and expand margins, while the latter can pass through only about 50% and therefore see margin decline.

Asset mapping & comparison

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

• Ajinomoto Co Inc / 2802.JP

  Core coverage name; the report upgrades the rating and raises the target price.

  Strengths

  The ABF business has room for like-for-like price increases; the Seasonings & Foods brand and market share support cost pass-through; EPS forecasts are above consensus; both DCF and SOTP support a target price close to JPY 6,700.

  Weaknesses

  The Frozen Foods industry is fragmented and has weak cost pass-through ability, and FY3/27 margins are expected to contract; the share price has already rerated steadily over the past several years, so valuation multiples are not low.

  Comparison

  The report notes that ABF-related comparable companies such as Ibiden have already rerated significantly, lifting the SOTP valuation of Ajinomoto's ABF segment; EPS forecasts are also above Bloomberg consensus.

  Risks

  Supply-chain disruption at the single ABF production base due to natural disasters, entry of new competitors or significant capacity expansion by existing competitor Sekisui, IC substrate technology advances that reduce demand for ABF and other thermal barrier materials, spillover of competition from Chinese MSG producers into branded products, and value-destructive M&A in Healthcare.

Key data

• Rating changeOutperform, previously Market-PerformThe report title and front page disclose a rating upgrade.
• Target priceJPY 6,700, previously JPY 5,100This implies about 26% upside potential.
• Current share priceAbout JPY 5,300The chart shows the target price is about 26% above the current price.
• FY3/27-29 EPS forecastJPY 151/191/226The report says this is about 7%/15%/17% above consensus.
• Overall Business Profit growth27%/24%/18% for FY3/27-29The report believes this is an acceleration from 14% in FY3/26.
• ABF revenue growth forecastAbout 35% in FY3/27 and FY3/28Supported by like-for-like price increases and strong demand for premium AI CPU/GPU-related products.
• ABF Business Profit growthAbout 56%The report expects operating leverage to recover to about 1.6x.
• Seasonings & Foods cost pressureAbout a 360bps margin headwind, about JPY 33bn before mitigationThe report expects this can be more than offset through price increases, with margins expanding by about 100bps.
• Frozen Foods cost pressureAbout 700bps of margin pressure, about JPY 20bn before mitigationThe report expects only about 50% can be passed on to consumers, with FY3/27 margin falling from 3.1% to 1.7%.

Impact & implications

For investors, the key implication of the report is that Ajinomoto's investment narrative is extending from traditional food-company pricing power to pricing power and profit elasticity within the semiconductor materials value chain. If downstream ABF capacity constraints continue to push customer prices higher, Ajinomoto may be able to raise prices further and drive earnings upside; however, raw-material inflation, insufficient pass-through in Frozen Foods, and shifts in the ABF competitive landscape may still limit profit realization.

Risks

• Supply-chain disruption at the single production base for Functional Materials due to natural disasters.
• Entry of new Build Up Film competitors, or significant recent capacity expansion by existing competitor Sekisui.
• Advances in IC substrate technology reducing demand for ABF and other thermal barrier materials.
• Competition from Chinese MSG producers spreading from B2B into branded products.
• Value-destructive M&A in Healthcare.
• Further margin deterioration in Frozen Foods due to insufficient cost pass-through.

What to watch

• Whether downstream ABF substrate customers continue to raise prices, and whether Ajinomoto can further follow with like-for-like price increases.
• Whether ABF revenue in FY3/27 and FY3/28 can achieve about 35% growth, and whether operating leverage can recover to around 1.6x.
• Whether actual price increases in Seasonings & Foods can more than offset raw-material and oil-price pressure.
• Whether Frozen Foods restarts restructuring, especially optimization of small-scale capacity in Japan and Europe and non-Japanese product lines.
• The impact of WACC, terminal growth rate, and ABF comparable-company valuation changes on DCF and SOTP target prices.
• Whether company EPS continues to beat consensus and whether the market accepts a 35x target P/E.