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Security Analysis: Ajinomoto (Malaysia) Bhd

Highlights:

  • New product launched in 2020, animoVITAL (sports drink)
  • Decent ROIC (10-yr average at 11.6%)
  • Promising export market to drive future growth
  • Export market in Asia grew at 6% while Middle East grew at 11%
  • Intrinsic value in the range of RM 14 to RM 20 per share

Introduction

Ajinomoto (Malaysia) Bhd is engaged in manufacturing and selling of monosodium glutamate (MSG) and other related products. In general, the business is divided into two segments; Consumer segment and Industrial segment. The company’s main product is monosodium glutamate (MSG) sold under the brand AJI-NO-MOTO. However, they are also a major player in the food seasoning segment as well. The following are Ajinomoto’s product line-up:

Display of all Ajinomoto seasonings
Source: Ajinomoto Malaysia’s main website

More recently, Ajinomoto has begun to venture into the sports drink segment with its latest product launch; animoVITAL. The company is also providing sweeteners as well.

Display of Ajinomoto's non core products
Source: Ajinomoto Malaysia’s main website

Ajinomoto’s food enhancers and food seasonings are generally a defensive product. This is made clear during the pandemic, whereby Ajinomoto’s sales declined marginally. However, the defensive nature of Ajinomoto’s product is not the only reason for my optimistic view. Let me explain in detail…

Ajinomoto’s Free Cash Flow

The free cash flow is not exactly provided in the financial report but an investor would be able to calculate the free cash flow from the report. My calculations uses the following formula:

Free cash flow = Cash generated from operations (after tax) – depreciation – amortization
Depreciation and amortization is deducted from cash generated as they are real expenses to maintain the business and to maintain the company’s competitive edge.

Based on Ajinomoto’s latest annual results (2020), the company’s cash generated from operations (after tax) was RM 71.6 million while the depreciation and amortization was RM 18.4 million. This brings us to a free cash flow of RM 53.2 million. Let’s also look at the previous 5 years of free cash flow (see table below).

Year20202019201820172016
Cash from Operations (After Tax)RM 71.6 milRM 65.4 milRM 56.0 milRM 75.3 milRM 53.7 mil
Depreciation & AmortizationRM 18.4 milRM 16.1 milRM 13.1 milRM 11.8 milRM 11.5 mil
Free cash flowRM 53.2 milRM 49.3 milRM 42.9 milRM 63.5 milRM 42.2 mil

The average free cash flow within the last 5 years was RM 50.22 million. For the purpose of simplification I’ll use RM 50 million as the average free cash flow for further calculations.

Valuating Ajinomoto

Now that we have an idea of the free cash flow that Ajinomoto could potentially generate over the years, we can begin valuing the company.

Lets first assume that Ajinomoto’s free cash flow does not grow and remains stagnant at RM 50 million for the next 10 years (Scenario 1). In the assumption, I’ll assume that I’ll sell the shares at 20x earnings (after 10 years). Also, keep in mind that Ajinomoto has around RM 200 million in cash which should be added into the company’s value. This is possible as the company has no debts or liabilities which would drawdown on the cash reserves.

YearFree Cash Flow
(0% growth)
Present Value
(10% discounted)
Cash Held in AJIRM 200 millionRM 200 million
1RM 50 millionRM 45.5 million
2RM 50 millionRM 41.3 million
3RM 50 millionRM 37.6 million
4RM 50 millionRM 34.2 million
5RM 50 millionRM 31.0 million
6RM 50 millionRM 28.2 million
7RM 50 millionRM 25.7 million
8RM 50 millionRM 23.3 million
9RM 50 millionRM 21.2 million
10RM 50 millionRM 19.3 million
Selling Price of AJI (20x PE)RM 1,000 millionRM 385.5 million
Total RM 900 million
(rounded)
Scenario 1

Based on the calculations above, assuming that there is no growth in the company and we managed to sell it at 20x earnings, the company is worth approximately RM 900 million or RM 14.06 per share.

However, Ajinomoto has successfully penetrated into the Asian and Middle East markets. The Asian market has been growing at a rate of 5.6% in the last 10 years while the Middle East market has grown 11.1% in the last 10 years. Its safe to say that Ajinomoto’s revenue and earnings will grow at least by 4.5%. So with this new assumption, lets see the company’s value (Scenario 2).

YearFree Cash Flow
(4.5% growth)
Present Value
(10% discounted)
Cash Held in AJIRM 200 millionRM 200 million
1RM 52.3 millionRM 47.5 million
2RM 54.6 millionRM 45.1 million
3RM 57.1 millionRM 42.9 million
4RM 59.6 millionRM 40.7 million
5RM 62.3 millionRM 38.7 million
6RM 65.1 millionRM 36.7 million
7RM 68.0 millionRM 34.9 million
8RM 71.1 millionRM 33.2 million
9RM 74.3 millionRM 31.5 million
10RM 77.6 millionRM 29.9 million
Selling Price of AJI (20x PE)RM 1,553.0 millionRM 598.7 million
Total RM 1,150 million
(rounded)
Scenario 2

Now the value of the company is around RM 1,150 million or RM 18.0 per share.

To be honest, its unlikely that the company would have zero growth since the Ajinomoto dominates 80% of Malaysia’s MSG market. Therefore, the revenues should grow at least at the same rate as population growth, 3%. Therefore, the 4.5% growth rate calculated in Scenario 2 is likely to be a underestimate. The growth should be closer to 5 to 6%. Let’s see what could be the maximum valuation (Scenario 3) if we considered a 6% growth rate (meaning to say, Ajinomoto successfully gained market share in Asia and Middle East).

YearFree Cash Flow
(6% growth)
Present Value
(10% discounted)
Cash Held in AJIRM 200 millionRM 200 million
1RM 53.0 millionRM 48.2 million
2RM 56.2 millionRM 46.4 million
3RM 59.6 millionRM 44.7 million
4RM 63.1 millionRM 43.1 million
5RM 66.9 millionRM 41.5 million
6RM 70.9 millionRM 40.0 million
7RM 75.2 millionRM 38.6 million
8RM 79.7 millionRM 37.2 million
9RM 84.5 millionRM 35.8 million
10RM 89.5 millionRM 34.5 million
Selling Price of AJI (20x PE)RM 1,790 millionRM 690.1 million
Total RM 1,300 million
(rounded)
Scenario 3

In the Scenario 3 assumption, Ajinomoto’s valuation was RM 1,300 million or RM 20.3 per share.

Lets recap:

Scenario 1 (0% growth) = RM 14.1 per share

Scenario 2 (4.5% growth) = RM 18.0 per share

Scenario 3 (6.0% growth) = RM 20.3 per share

That makes the possible valuation of Ajinomoto to be within the range of RM 14.1 to RM 20.3 per share. The possibility of a zero growth is a low 10% while the likelihood of a 6% growth is probably 30%. I believe that a 4.5% growth has a high probability of 60% considering that Ajinomoto has been able to successfully expand its export market over the last 17 years. This gives us a 20% margin of safety to the intrinsic value of Ajinomoto.

The Moat

Ajinomoto’s main product is monosodium glutamate a product which is used as a flavor enhancer. Therefore, the product is mainly used by chefs from hawker stalls to large restaurants. From experience, different brands of MSG produces a different taste. Due to this subtle difference in taste, chefs tend to always use the same product brand regardless of the product’s premium price. No chef is willing to change their MSG brands due to the risk of changing the taste of their dishes.

This unusual effect ensures Ajinomoto’s customers are loyal to its brand and avoids product substitution. This wonderful moat allows Ajinomoto to sell at a premium to its competitors and gradually improve its profit margins.

Decent Return on Invested Capital

Over the years, Ajinomoto has consistently produced a double digit ROIC with an average 10 year ROIC of 11.6%. Refer to table below.

YearROIC
202011.9%
201912.1%
201813.0%
201713.9%
201613.1%
201510.3%
201410.8%
20138.0%
201210.9%
201111.8%
Average11.6%
10 year ROIC from Ajinomoto

Current Ratio and Debt

In the 20 years of analyzed data, Ajinomoto has maintained a ZERO debt position while its cash position gradually grew from RM 14 million in 2000 to RM 200 million in 2020. The current ratio as of 2020 was 5.5 whish highlights the company’s excessive liquidity. For reference, the current ratio should be 1.0 or greater to ensure that the company could reliably pay off its current liabilities.

Final Remarks

Personally, I like the strong positive cash flow from Ajinomoto. Based on my earlier analysis, assuming that Ajinomoto does not experience any growth from 2020 to 2030, the company is still worth RM 14.1 per share. However, this is unrealistic. The company is slowly but surely growing its export market which would comfortably grow its sales volume. Apart from growth in export, population growth will contribute to Ajinomoto’s volume growth. Therefore, its more likely that Ajinomoto’s free cash flow will growth at 4.5% (the value is my estimate). This would bring the value of Ajinomoto at RM 18 per share.

Its safe to say that the current price of Ajinomoto at RM 15 ++ per share is a 20% discount to its intrinsic value. I will be accumulating the company’s shares if it continues to trade within this RM 15 range.

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Disclaimer: The article is written purely for the purpose of education and entertainment only. The content of this article is an expression of my opinion and should not be taken as professional advise. If you are seeking for professional advise, please consult your financial advisors. You should do your own research and/or seek expert’s advice when doing your investments. Any decision that you made is your own and the author should not be held accountable.

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