[Into the Stocks] Nongshim Breathes Easier with Ramen Price Increase

[Asia Economy Reporter Song Hwajeong] Nongshim, which had been experiencing sluggish performance since the beginning of this year, has started a full-fledged rebound since last month. Expectations of improved earnings due to the price increase of ramen led to a stock price rebound. The ramen price hike is expected to be a much-needed relief for Nongshim.

According to the Korea Exchange on the 3rd, Nongshim's stock price rose 5.26% from the beginning of this month until the day before. The stock price, which had been stagnant after falling below 300,000 KRW earlier this year, recovered the 300,000 KRW level on June 6 and has steadily risen to around 330,000 KRW this month, reaching new highs.

Ramen Price Increase for the First Time in 5 Years... A Blessing in Drought

On the 29th of last month, Nongshim announced that it would raise the shipment prices of major ramen products, including Shin Ramyun, by an average of 6.8% starting from the 16th of this month. This is the first time Nongshim has increased ramen prices in 4 years and 8 months since December 2016. The price increase rates for major products based on shipment prices are 7.6% for Shin Ramyun, 6.1% for Ansungtangmyun, and 4.4% for Yukgaejang Sabalmyeon.

Jomi Jin, a researcher at NH Investment & Securities, analyzed, "This price increase is due to the rise in prices of key raw materials such as palm oil and flour, as well as increased management costs including labor and logistics expenses." She added, "Since the domestic ramen market growth rate is stagnant, the price increase has a greater significance compared to other product categories." Researcher Cho also noted, "Nongshim holds more than half of the domestic ramen market share, so it will benefit the most from the price increase," adding, "There is still a possibility of price increases in the confectionery division." As of the first quarter of this year, Nongshim's ramen market share was 56.4%.

The price increase is expected to lead to improved earnings. NH Investment & Securities forecasted that Nongshim's domestic subsidiary's profit could double due to this price hike. Researcher Cho estimated, "With an average 6.8% increase in ramen shipment prices, annual sales are expected to improve by 90 billion KRW," adding, "Considering the coverage of increased costs and promotional activities to defend against initial volume declines, operating profit improvement is expected to be around 40 billion KRW annually. Given the recent situation where the domestic subsidiary's annual operating profit remains between 30 billion and 40 billion KRW due to intensified competition, this means operating profit could roughly double."

The effect of the price increase is expected to appear from the fourth quarter. DB Financial Investment researcher Cha Jaehun said, "Considering the cost burden from rising raw and subsidiary material prices, as well as increased logistics and labor costs, operating profit is not expected to increase significantly immediately this year," adding, "If other conditions remain the same, the induced demand from the price increase will mostly concentrate in the third quarter, and from the fourth quarter, volume recovery along with positive effects of the price increase are expected to begin." DB Financial Investment raised Nongshim's 2021 and 2022 earnings per share (EPS) estimates by 3% and 12%, respectively.

This price increase is expected to ensure a stable earnings trend through next year. Hana Financial Investment researcher Shim Eunju said, "Considering the high base in the domestic market last year and the timing of the price increase reflection, separate profit and loss will inevitably decline significantly compared to the same period last year until the third quarter," adding, "From the fourth quarter, as the price increase begins to be reflected, a comfortable earnings trend can be expected through next year."

Second Quarter Earnings Are Sluggish... Stock Price at Historic Lows

Second-quarter earnings are expected to decline sharply compared to the same period last year. According to financial information provider FnGuide, the consensus forecast for Nongshim's second-quarter earnings is 632.7 billion KRW in sales and 19.9 billion KRW in operating profit. This represents decreases of 5.28% and 51.93%, respectively, compared to the same period last year. KB Securities researcher Lee Seonhwa said, "Second-quarter sales are expected to be 627.5 billion KRW and operating profit 19.8 billion KRW, in line with the consensus for operating profit," adding, "The second quarter is affected by a low base formed last year due to COVID-19 benefits, and sluggish performance is expected due to cost burdens from rising raw material prices and regular wage negotiations at the Korean subsidiary."

The stock price is at a historically low level. Researcher Shim explained, "The current stock price is trading at a 12-month forward price-to-book ratio (PBR) of 0.9 times, located at the lower end of the historical band," adding, "Although short-term earnings will be poor compared to the previous year’s record, it is expected to enter a comfortable earnings growth phase in the second half, making it a good time for bargain buying."