Consumer: Ajinomoto Malaysia Berhad

Introduction

Ajinomoto has been producing AJI-NO-MOTO monosodium glutamate since 1964 and was subsequently listed in 1970. It is also one of the very first japanese joint-venture companies to be set up in Malaysia. Its parent company owns a 50.05% stake while Amanahraya Trustees Bhd owns 11.95%.

Aji has successfully diversified into production of other flavour enhancers but also into seasoning mixes, low calorie sweeteners and organic fertilizer. However, the group remains well known for its flagship flavour enhancer; Aji-No-Moto which is believed to command a overwhelming 85%-95% of the MSG market in Malaysia. The business model of Aji is relatively simple just like Dutch Lady, no subsidiaries nor associates.

They have other brand products which you might have heard such as Tencho (industrial food seasoning), Aji-Shio (flavoured salt and pepper), Seri-Aji (fried rice seasoning powder) & Pal Sweet (low calorie sweetener).

Fundamental

1. Does the company have an identifiable durable competitive advantage?

Having almost dominate the entire MSG market in Malaysia and is an indispensable item in almost every Malaysian home, it has a sustainable competitive advantage as a dynamic food seasoning manufacturer brand name that is trusted by Malaysians for decades.

2. Do you understand how the product/service works?

Aji's product is based entirely on umani which was recognised globally as the 5th taste, different from the other four basic taste (salty, sweet, bitter and sour). It is this new taste that Aji relies on for its business. Aji-no-moto if you don't know stands for essence of taste.

3. What is the chance that it will become obsolete (KO) in the next twenty years?

The answer is simple: NO. Though MSG has been hit by some quarters saying that it is bad for health, every concerned public body that has ever investigated it has given a clean bill of health. Maybe except Consumer Association of Penang (which I find BS as they list almost every food bad, then what am I to eat le?) The only concern in the near future would be MSG-phobia folks on the rise and that could slow down growth.

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes, and it has low diversification policy therefore able to utilise existing plants and equipments with little hassle.

5. What is the company's financial history and status?

• Net Profit Margin is in the 8-10% range. This quite similar to Dutch Lady, also a consumer stock albeit different market segment.
• Return of Equity which means how much shareholders get in return of investment is in the 10-14% range over the last 10 years.
• Revenue Growth Rate saw a tumble in 2006 & 2007. This is due to increase on global fuel oil prices that had a big impact in operation cost. This tumble is even greater than in the 2009 meltdown which suggests that Aji's Achilles heel for better revenue figure is crude oil price.

• Note that there is a change in financial year in 2001 therefore excluded.
• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years with the exception of 2006 and 2007 (very high global oil prices if you remember it was usd120++). 
• I like the fact that they increase dividend payouts in tandem with their earnings. Kudos to Aji here!

6. Is the company conservatively financed?
Yes and with no debts. Aji has RM43mil in cash and bank balances enabling the company to deal with future high oil prices. What is amazing is that Aji has been debt-free from 1985 to present. I got this piece of Info from Dynaquest.

7. Is the company actively buying back its shares?
The only time the company has issued a bonus of 1:2 is in 2002. With little capex required for expansion or upgrades I don't see they have a need for more capital funding. They could probably issue a bonus within the next 5 years time-frame to dilute the share price to make it more trade-able for investors. This is just a wild guess :)

8. Is the company free to raise prices with inflation?
I have no such data. Aji is quite low profile with little news going around. BUT being the dominant player for MSG in Malaysia, they can easily adjust the selling prices of its product to protect its margins.

9. Are large capital expenditures required to update plant and equipment?

No, considering its relatively stable food operations which require minimal capital expenditure and low diversification policy.

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that AJI's revenue growth rate is at 11% for the next 2 years and 9% for the last remaining 3 years because I think oil prices will bounce back higher owing to lack of supply. 91% operating cost margin, 25% corporate tax, 2% re-investment for the next 5 years. Having computed all these in my opinion it is fair to buy..

AJI at RM3.16 to RM3.86 for ~15-13% discount rate.

If you would have bought at the start of the bull run in 2001 (say RM2) after the dotcom crisis, the stock would have given you a 10% per annum gain not accounting dividend reinvestment which would give you more. Below will show you AJI's stock price historical performance.

What Do I Think? 

Currently it is overpriced based on my estimates. Having said so it could still be worth to purchase for a 10% discount rate since I would expect the share price to grow only by around 10% per annum.


The only problem is global fuel prices because energy and water are used in large quantities in the manufacturing process in Aji's products. As oil becomes more scarce which will happen in my lifetime, it will inevitably lead to higher oil prices. What will Aji do then, use a different source of energy?


On the bright side, Aji is doing extremely well at what it does best. Though a large portion of its products is for domestic consumption (~70%), they do export to other Asian countries (~23%) and to the Middle East countries (~7%). Sales from export is important as the local market becomes saturated and Aji is heading on the right direction.


I do not deny that Aji is a good stock to own as the dividend yield is ~4.5% plus reasonable capital gain. Between Aji and Dutch Lady, I will still choose Dutch Lady which has a higher dividend yield :) Gogo baby~!