[Click eStock] "Nongshim Reflects Ramen Price Increase... Earnings Improvement Expected"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained its buy rating and target price of 500,000 KRW for Nongshim on the 1st, based on the expectation of sharp earnings improvement following the price increase of ramen.

Nongshim's consolidated sales in the third quarter reached 669.9 billion KRW, up 2.8% compared to the same period last year, while operating profit decreased by 11.2% to 26 billion KRW. Separate sales increased by 4.1% to 541.1 billion KRW, but operating profit fell by 15.9% to 13.5 billion KRW. As the high base from last year begins to ease and the ramen price increase is reflected from September, earnings are expected to have passed the bottom.

Total ramen sales are predicted to increase by 4.3% compared to last year. Domestically, as the high base from last year eases, sales are expected to return to a 2.6% growth compared to the same period last year, with the price increase gradually being reflected since September. The export sector remains solid enough to offset the high base. Compared to a year ago, top-line growth of around 15% is expected. Domestic ramen market share is estimated at 55.8%.

Snack sales are also expected to stabilize as the high base from last year begins to ease. Combined sales of overseas subsidiaries appear to be maintaining an upward trend compared to the previous year. In particular, despite the high base last year, the US and Canada regions are expected to show solid growth in the 10% range annually, while China is forecasted to see about an 8% decrease in sales.

Next year, separate operating profit is estimated to increase by 43.7% compared to the same period last year, reaching 69 billion KRW. This is because the effect of the domestic ramen price increase starting from September is expected to lead to sharp profit improvement quarter over quarter. Following the domestic ramen price increase, export prices in the second half are also expected to be naturally adjusted. Eunju Shim, a researcher at Hana Financial Investment, explained, “This is a point where earnings upside can be expected, and overseas subsidiaries may also have the possibility of price increases. Assuming a price increase of more than 6% for the China subsidiary, an increase of about 6 billion KRW in consolidated operating profit compared to existing estimates can be expected. The last price increase for the China subsidiary was in August 2017.”

Researcher Shim added, “The current stock price is trading at a 12-month forward price-to-book ratio (PBR) of 0.8 times, which is at the lower end of the historical band. Considering the sharp earnings improvement from the fourth quarter, an aggressive buying strategy seems valid.”