"Food and Beverage Industry, Processed Food Demand Increase and Profitability Improvement Expected to Drive Further Growth"

Samsung Securities Report
Positive Outlook for Orion, HiteJinro, and SPC Samlip

[Asia Economy Reporter Minji Lee] Since the outbreak of the novel coronavirus infection (COVID-19), demand for processed foods has increased and profitability has improved, leading to opinions that growth in the food and beverage sector can continue. In this regard, on the 18th, Samsung Securities issued a positive outlook on Orion, Hite Jinro, and SPC Samlip.

In the first half of the year, the food and beverage sector showed generally favorable stock price trends as the demand for processed foods increased due to COVID-19 and the sector's defensive nature was highlighted. However, after the first half earnings announcements, concerns arose that profit growth in the second half would not be as strong as in the first half, and that the strong performance this year could increase pressure next year, resulting in a stock price correction of about 15-20%.

Regarding this, Samsung Securities analyst Sanghoon Cho explained, “Currently, the PER valuation of the food and beverage sector is 10.8 times, which is discounted compared to the KOSPI PER valuation (12 times). It is time to pay attention to the fact that the annual earnings of the food and beverage sector in the third quarter actually increased compared to the previous year.” Samsung Securities estimates that the operating profit of 11 food and beverage-related companies in the third quarter will increase by 17% year-on-year.

Despite the recent downgrade to social distancing level 1, the prolonged impact on dining-out businesses suggests that demand for ready-to-eat meals (HMR) may structurally increase. Notably, the new consumer base for HMR has exploded. Initially, the main consumers of the HMR market were single-person households in their 20s and 30s, but now the elderly have emerged as major customers of HMR consumption.

The trend of Korean won appreciation is also positive for the food and beverage sector. Since the sector has a high proportion of raw material imports and significant foreign currency debt, an increase in the dollar-won exchange rate raises costs and expands foreign currency net debt valuation losses. Exchange rates and the stock prices of the food and beverage sector typically show an inverse correlation.

Stock price increases are expected for Orion, Hite Jinro, and SPC Samlip, which can maintain favorable earnings momentum in the second half. Orion is expected to benefit from a leverage effect due to market share recovery in China. The estimated operating profit for the third quarter is 108.8 billion KRW, which is expected to meet market expectations. Analyst Sanghoon Cho analyzed, “Although promotional expenses related to new products are expected to increase, strong shelf control will help maintain good performance.”

In particular, Hite Jinro is positive as the company’s sales volume continues to grow despite the downturn in the liquor market caused by COVID-19. The proportion of sales from entertainment bars, which require high promotional expenses, is decreasing, while the proportion of home-use sales, which require relatively less promotional expenses, is increasing, suggesting further stock price gains.

SPC Samlip is expected to exceed market expectations by recording an operating profit of 12.1 billion KRW in the third quarter, a 418% increase compared to the same period last year. The bakery business, its core operation, is showing steady growth, and with sales growth in the food division and efforts to reduce fixed costs, it is expected to achieve profit growth for the first time in seven quarters.