[Click eStock] F&B Losers' Revival 'Weight Increase'... Top Pick Highlighting Earnings Momentum

[Asia Economy Reporter Lee Seon-ae] On the 14th, Meritz Securities issued an overweight investment opinion on the food and beverage sector.

The food and beverage sector experienced re-rating phases twice in the past: first from 2003 to 2007, and second from 2011 to 2015. These periods maximized profitability improvements through price increases and cost reductions. However, from 2016 onwards, the sector underwent four years of de-rating due to a sharp rise in raw sugar prices and weakened pricing power, which slowed earnings growth momentum. In the first half of last year, demand expansion driven by COVID-19 issues and renewed focus on earnings stability led to top-line growth, despite limited price increases (P) and continued stabilization of cost (C) reductions.

From the second half of the year, cost burdens began to rise, but recovery in the industry is underway, led by comprehensive food companies with strong brands successfully implementing price increases, extending to food ingredient distribution and alcoholic beverage sectors.

Researcher Kim Jung-wook of Meritz Securities stated, "Next year, we expect continued differentiation within the food and beverage industry by sector, with earnings momentum highlighted sequentially from 'With COVID-19 → margin spread improvement,' and we recommend an overweight opinion on the food and beverage sector." He added, "Our top picks are HiteJinro and CJ Freshway, with Orion, Nongshim, and CJ CheilJedang as stocks of interest."

HiteJinro is expected to benefit from the With COVID-19 phase. Since the launch of Terra, HiteJinro's market share rapidly increased, especially in the metropolitan area, causing a significant rise in its stock price. However, the upward trend slowed due to earnings underperformance relative to elevated consensus estimates. Generally, hit alcoholic beverage products show a trend of steadily increasing market share for over 10 years, as consumers in their 20s who first enter the alcohol market become main consumers and continue to consume the same product.

Food ingredient distribution, which suffered the most from social distancing regulations, is also expected to benefit from the With COVID-19 phase, with CJ Freshway recommended as a top pick. CJ Freshway is expected to record an operating profit of 54.1 billion KRW this year, similar to 58.1 billion KRW in 2019. This indicates that CJ Freshway is expected to normalize earnings in 2021 and achieve top-line growth in 2022 due to recovery in upstream industries, with notable operating margin improvements driven by cost efficiency.

In the second half of this year, comprehensive food and food ingredient distribution companies showed continuous improvement in cost of sales ratios. Comprehensive food companies achieved top-line growth through price increases, resulting in a decline in cost of sales ratios, while food ingredient distribution companies actively streamlined their cost structures during COVID-19 by eliminating low-margin business units and improving workforce efficiency. Therefore, if comprehensive food companies do not achieve additional sales growth next year, they are expected to face significant burdens due to a high base effect. In contrast, food ingredient distribution companies are expected to show remarkable top-line growth, supported by their streamlined cost structures and increased dining-out demand.

Category companies such as ramen and confectionery did not raise prices during the period of rising cost ratios starting in the second half of 2020 but succeeded in price increases in the third quarter of this year. Therefore, in 2022, earnings growth is expected as margin expansion through price increases is reflected in results, and if grain prices stabilize and decline, further margin improvement is likely to be highlighted.

This content was produced with the assistance of AI translation services.