Report Interpretation

Overview

This report assesses Ajinomoto's first-quarter results, the company's upgraded FY3/27 guidance, and subsequent trends across its business segments. Goldman Sachs believes Functional Materials and Seasonings and Foods still have room to exceed guidance, sufficient to offset weakness in Frozen Foods and some cost pressure arising from the Middle East situation. It therefore raises its earnings forecasts and target price while maintaining its Buy rating.

Core views

First-quarter results and revisions to foreign-exchange assumptions jointly drove the forecast upgrades. Goldman Sachs changed its yen/US dollar assumption from ¥155/US$ to ¥160/US$ and raised its forecasts for Functional Materials, particularly the ABF business, and Seasonings and Foods, while lowering its outlook for Frozen Foods. Consequently, it raised its FY3/27, FY3/28, and FY3/29 operating profit forecasts by 2.1%, 2.3%, and 2.1%, respectively, to ¥221.1bn, ¥260.0bn, and ¥299.1bn. Revenue forecasts for the same periods are ¥1,734.3bn, ¥1,865.8bn, and ¥1,989.8bn, respectively, representing increases of 1.1%, 1.6%, and 1.7% from its previous forecasts. Goldman Sachs also raised its 12-month target price from ¥6,500 to ¥6,700 and maintained its Buy rating; based on the report price of ¥5,344, this implies 25.4% upside. The company has raised its FY3/27 operating profit guidance from ¥197bn to ¥202bn, but Goldman Sachs' ¥221.1bn forecast remains substantially higher. The report believes the potential upside will come mainly from Functional Materials and Seasonings and Foods, while Frozen Foods may fall short of guidance. Overall, Goldman Sachs expects FY3/27-FY3/29 revenue growth of 9.5%, 7.6%, and 6.6%, respectively, and operating profit growth of 22.0%, 17.6%, and 15.0%. The operating margin is expected to rise from 11.4% in FY3/26 to 12.7% in FY3/27, 13.9% in FY3/28, and 15.0% in FY3/29. Net profit forecasts are ¥139.0bn, ¥167.6bn, and ¥195.8bn, respectively; basic earnings per share forecasts are ¥146.6, ¥181.2, and ¥217.5; and dividend forecasts are ¥50, ¥60, and ¥72. Functional Materials is the strongest source of growth. The business recorded first-quarter sales of ¥33.1bn, up 54% year over year, and operating profit of ¥19.1bn, up 77% year over year. The company stated that strong demand continued into the July-September quarter. Goldman Sachs expects FY3/27 Functional Materials operating profit to reach ¥79.3bn, up 45% year over year, with a margin of 56%, significantly above company guidance of ¥65.5bn. Its rationale is that the current guidance remains conservative and essentially incorporates only the first-quarter performance. Goldman Sachs increased its FY3/27 operating profit forecast for the segment by ¥5.1bn relative to its previous forecast and expects sales to rise from ¥140.8bn in FY3/27 to ¥223.8bn in FY3/29, with operating profit increasing from ¥79.3bn to ¥127.6bn, reflecting continued growth in ABF demand. Seasonings and Foods also made a strong start to the first quarter, recording sales of ¥238.7bn, up 12% year over year, and operating profit of ¥41.0bn, up 13% year over year, which was strong relative to company guidance for only 2% FY3/27 operating profit growth. Goldman Sachs therefore increased its FY3/27 operating profit forecast for the segment by ¥0.4bn relative to its previous forecast. However, first-quarter profit included a one-time gain of less than several billion yen resulting from a reduction in unrealized profit eliminations, and the higher costs caused by the Middle East situation are expected to become fully apparent from the second quarter. Subsequent profit momentum may therefore be weaker than in the first quarter. Goldman Sachs expects the segment's FY3/27 operating profit to be ¥152.4bn, rising to ¥169.1bn in FY3/29. The Middle East situation is an important variable in cost forecasts. Assuming Dubai crude oil at US$110/barrel and an exchange rate of ¥158/US$ from the second quarter, Ajinomoto expects a ¥25bn negative impact on FY3/27 operating profit, below its initial fiscal-year estimate of ¥30bn. Goldman Sachs itself expects incremental costs of ¥6.5bn-¥7.0bn from the second quarter and believes the company's continued price increases can offset part of the impact, thereby supporting further profit growth in FY3/28. The report's logic is not that cost pressure will disappear, but that pricing actions, product demand, and growth in high-margin Functional Materials can offset this headwind. Frozen Foods is the segment for which forecasts were lowered. First-quarter results fell short of Goldman Sachs' expectations, so it reduced its FY3/27 operating profit forecast for the segment by ¥1.0bn relative to its previous forecast and expects it may fall short of company guidance. Its FY3/27 sales and operating profit forecasts are ¥302.1bn and ¥10.0bn, respectively, below company guidance of ¥310.6bn in sales and ¥12.1bn in operating profit, making the segment the principal drag. The medium-term investment thesis is based on the business mix and pricing power. Ajinomoto has Seasonings and Foods and Frozen Foods businesses, participates in the healthcare field through CDMO operations, and manufactures Ajinomoto Build-Up Film (ABF), which is used as interlayer insulation in semiconductor packaging substrates. The report believes the company has high market shares in seasonings and ABF, giving it strong pricing power. Overseas revenue accounted for 64% of FY3/26 revenue, above the subsector average. Goldman Sachs believes medium-term profit drivers include price increases to offset cost inflation, growing demand for Seasonings and Foods in emerging markets, and rising ABF demand. It expects overall operating profit to grow at an 18% CAGR over the next three years, above the 6.0% average for its food and beverage coverage companies. The report summarizes FY2027E ROE at approximately 24%, also significantly above the coverage average of 11%, while the detailed forecast table shows FY3/28E ROE of 24.5%. On valuation, the ¥6,700 target price is based on 31x FY3/28E EV/NOPAT. This multiple represents a 61% premium to the industry average of 19x, based on the average premium over the past 12 months. Goldman Sachs supports this valuation positioning with faster profit growth, higher financial returns, and steady earnings improvement. It forecasts ROE rising from 19.6% in FY3/26 to 20.1% in FY3/27, 24.5% in FY3/28, and 28.5% in FY3/29, while free cash flow is expected to be ¥110.5bn, ¥148.2bn, and ¥183.6bn, respectively.

Analysis framework

Goldman Sachs first compares first-quarter actual results by segment with its own forecasts and the company's full-year guidance. It then adjusts its forecasts for Functional Materials, Seasonings and Foods, and Frozen Foods item by item, incorporating changes in its yen/US dollar assumption and its crude-oil and cost assumptions under the Middle East situation. It subsequently consolidates its revenue, profit, margin, EPS, ROE, and cash-flow forecasts, compares the company's growth and financial returns with the averages for its food and beverage coverage companies, and finally derives its 12-month target price using a relative FY3/28E EV/NOPAT valuation. Data sources include company materials, IFIS, LSEG Data & Analytics, FactSet, and Goldman Sachs Research estimates.

Methodology notes

• Valuation methodology

  FY3/28E EV/NOPAT relative valuation

  The report measures valuation using enterprise value divided by net operating profit after tax and calculates the target price at 31x FY3/28E. This multiple represents a 61% premium to the industry average of 19x, based on the average premium over the past 12 months.

• Company fundamentals and financial framework

  Comparison of segment earnings forecasts with management guidance

  The report separately compares first-quarter performance, company guidance, and Goldman Sachs' previous forecasts for Functional Materials, Seasonings and Foods, and Frozen Foods, then consolidates them into three-year forecasts for revenue, profit, margins, EPS, and ROE.

• Quantitative/Factor/Portfolio TheoryMulti-factor model

  GS Factor Profile

  Goldman Sachs measures growth using forward sales, EBITDA, and EPS growth, and financial returns using ROE, ROCE, and CROCI. It combines these with valuation metrics such as P/E, P/B, and EV/EBITDA to create standardized percentiles for comparing an individual stock with the market and industry peers.

Asset mapping & comparison

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

• Ajinomoto (2802.T)

  The only primary company covered in the report; growth in Functional Materials and Seasonings and Foods is the main basis for the earnings upgrades and the maintained Buy rating.

  Strengths

  High market shares and strong pricing power in seasonings and ABF; robust ABF demand; overseas revenue share of 64%; expected profit growth and ROE above the coverage-company averages.

  Weaknesses

  First-quarter Frozen Foods results fell short of expectations; first-quarter Seasonings and Foods profit included a one-time gain, and the segment faces higher costs from the second quarter.

  Comparison

  Operating profit is expected to grow at an 18% CAGR over the next three years, above the coverage-company average of 6.0%; the report summarizes FY2027E ROE at approximately 24%, above the coverage average of 11%.

  Risks

  Declines in sales volume, average selling prices, or ABF demand; deterioration in the healthcare operating environment; and cost increases caused by the Middle East situation.

Key data

• 12-month target price¥6,700Raised from ¥6,500; implies 25.4% upside from the report price of ¥5,344
• FY3/27 company operating profit guidance¥202bnRaised from ¥197bn; Goldman Sachs forecasts ¥221.1bn
• Operating profit forecast revisions+2.1% / +2.3% / +2.1%Corresponding to FY3/27, FY3/28, and FY3/29, respectively
• Three-year operating profit CAGR18%Goldman Sachs forecast; the average for its food and beverage coverage companies is 6.0%
• FY2027E ROEApproximately 24%Summary figure in the report, versus the coverage-company average of 11%; FY3/28E is 24.5% in the detailed table
• Functional Materials first-quarter resultsSales ¥33.1bn; operating profit ¥19.1bnUp 54% and 77% year over year, respectively
• FY3/27 Functional Materials operating profit forecast¥79.3bnUp 45% year over year, with a 56% margin; company guidance is ¥65.5bn
• Seasonings and Foods first-quarter resultsSales ¥238.7bn; operating profit ¥41.0bnUp 12% and 13% year over year, respectively, but including a one-time positive impact of less than several billion yen
• Impact of the Middle East situationThe company expects a ¥25bn reduction in FY3/27 operating profitThe initial fiscal-year estimate was ¥30bn; assumes Dubai crude oil at US$110/barrel and an exchange rate of ¥158/US$ from the second quarter
• Goldman Sachs incremental cost assumption¥6.5bn-¥7.0bnExpected to arise from the second quarter
• Valuation multiple31x FY3/28E EV/NOPATA 61% premium to the industry average of 19x
• FY3/26 overseas revenue share64%Above the subsector average

Impact & implications

The report believes rapid growth in Functional Materials, particularly the ABF business, the pricing power of Seasonings and Foods, and emerging-market demand can drive continued improvement in Ajinomoto's margins and ROE while creating room to exceed the company's upgraded guidance. Weakness in Frozen Foods and Middle East-related costs will weigh on near-term growth, but Goldman Sachs expects price increases to gradually offset these costs and support continued profit growth in FY3/28.

Risks

• A decline in sales volume could weaken revenue and profit growth.
• A decline in average selling prices could undermine the pricing power and margin improvement on which the report relies.
• A decline in ABF demand would directly affect the high-growth expectations for the Functional Materials business.
• A deterioration in the healthcare operating environment could weigh on CDMO and other related businesses.
• Increases in crude-oil, foreign-exchange, and other costs caused by the Middle East situation could exceed the offsetting benefit from price increases.