Covid-19 Presents Opportunity for Earnings to Level up

The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. — Ed.

We believe that the F&B industry’s normalization trend will sustain in 2H20 on the back of rising demand, stabilizing raw material prices, and an easing in promotional activities. In addition, growth momentum in overseas markets is likely to emerge, a factor which should expand the consumption base for K-food and thus serve as a mid/long-term growth engine.

Price normalization and overseas growth momentum anticipated

We maintain a Positive rating on the F&B sector, continuing to suggest CJCJ as our top pick. We expect KT&G, Orion, Nongshim, Samyang Foods, and Pulmuone to benefit from increased growth momentum in overseas markets from 2H20. In particular, we anticipate that Covid-19 will serve as a catalyst for: 1) increased home meal replacement (HMR) consumption; 2) higher online channel penetration; and 3) greater overseas sales.

K-food spreading globally

We note that the global F&B market leader Nestle has risen to prominence on the back of M&As and localization. In particular, World War II (WWII) presented Nestle with an opportunity to grow Nescafe’s global presence. In a similar manner, Covid-19 is expected to play a positive role expanding the consumption base of Korean food (‘K-food’). For major players, overseas sales should grow at a double-digit pace from 2Q20, contributing more to the overall performance of F&B companies.

Price normalization & demand growth to continue

We expect the F&B industry’s OP growth trend to sustain going forward, estimating that the 14 largest players will see OPM ratchet up by an average of 0.6%p y-y in 2Q20, 0.5%p y-y in 3Q20, and 0.7%p y-y in 4Q20. Positive industry trends are forecast to sustain in 2H20, driven by a 1H20 stabilization in raw material prices, an easing in promotional activities, the normalization of domestic demand (backed by increased home meal demand), and expanding K-food consumption in overseas markets. However, livestock prices (centering on pork) will likely continue to rise, given: 1) a recovery in demand following last year’s African swine fever (ASF) outbreak; and 2) tightened global supply/demand on an easing in Covid-19. That said, as these are not structural issues, we expect the impact on processed food companies to be limited.