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Frugal consumers, higher costs take fizz out of Japan's food stocks

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03/14/2019 | 03:42am EDT
FILE PHOTO: Processed foods are displayed at the Tsukiji fish market in Tokyo

TOKYO (Reuters) - Japan's food firms, once seen as a rare group of winners in the country's fight against deflation, are falling out of favour with investors as consumers reject price hikes on many household products.

Food company shares have only added 2.8 percent this year, compared with a 7.5 percent gain in the Topix, which in turn underperformed the world's many other equity indexes. For graphic on
YTD performances of Topix's major sectors, click https://tmsnrt.rs/2F8BI2A

Prices of food items including soft drinks, yoghurt, ramen noodles and ice cream, will go up from this spring, pushed up by higher labour and transportation costs.

At the same time, the increase in retail prices firms can expect to deliver will be capped by consumer resistance and what economists describe as Japan's deflationary mindset. "Even if companies can raise their top lines, they would be struggling to make profits due to rising costs and that's the main challenge that food makers are facing right now," said Keita Kubota, senior investment manager at Aberdeen Standard Investment, adding that the earnings from Coca-Cola and Suntory do not bode well for the food industry.

"While there are lots of price hikes planned in 2019, we still don't know how much these price hikes would lead to profits."

Indeed, many companies, such as Coca-Cola Bottlers Japan Holdings Inc, Suntory Beverage & Food and potato chips maker Calbee Inc, have warned of falls in profits as the planned price hikes fail to cover rising upstream costs.

Mizuho Securities says the combined operating profit for 20 Japanese food companies for the December quarter fell 5 percent year-on-year.

In January, Coca-Cola Japan said it would raise prices on some of its large bottled beverages in April. This, however, would not help counter the full impact of rising costs and on Feb. 14 it said it expected a 29 percent hit to its 2019 annual profit.

The next day, its share price tumbled 13 percent to a 2-1/2 year low, around where it has been trading since.

For graphic on Japan food companies, click https://tmsnrt.rs/2F8nC19

It's a similar picture in other parts of the sector with Suntory Beverage to raise its beverage prices in May and forecasting a 17 percent drop in annual net profit. Calbee will raise its potato chips prices in May and has slashed its operating profit outlook by 8.8 percent for the fiscal year through March.

The sector's market underperformance contrasts with three to four years ago, when investors cheered firms' food price hikes, buoyed by hopes that monetary and fiscal stimulus would help businesses pass on costs to customers and stoke a virtuous consumption cycle.

Now, however, not even an exemption for food from a planned sales tax hike in October has been able help stocks in the sector.

That's partly because of still high valuations: food maker shares currently trade at 18.6-times earnings, compared with a multiple of 13 for Topix and 9.8 for the auto sector.

"The government failed to counter falling consumption when they raised sales tax in 2014. Consumer sentiment hasn't changed since then," said Hiroyuki Ueno, a senior strategist at Sumitomo Mitsui Trust Asset Management.

"Since valuations have become too expensive, we want to avoid food shares."

(Reporting by Ayai Tomisawa; Editing by Sam Holmes)

By Ayai Tomisawa

Stocks mentioned in the article
ChangeLast1st jan.
CALBEE INC -0.33% 3010 End-of-day quote.-10.68%
COCA-COLA BOTTLERS JAPAN HOLDINGS INC 0.32% 2796 End-of-day quote.-12.49%
SUNTORY BEVERAGE & FOOD LTD -0.59% 5050 End-of-day quote.3.06%
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Financials (JPY)
Sales 2019 250 B
EBIT 2019 -
Net income 2019 19 178 M
Finance 2019 48 932 M
Yield 2019 1,58%
P/E ratio 2019 20,86
P/E ratio 2020 21,57
EV / Sales 2019 1,41x
EV / Sales 2020 1,34x
Capitalization 403 B
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Technical analysis trends CALBEE INC
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus HOLD
Number of Analysts 8
Average target price 3 036  JPY
Spread / Average Target 0,85%
EPS Revisions
Shuji Ito President, CEO & Representative Director
Koichi Kikuchi GM-Finance, Accounting & Investor Relations
Yuzaburo Mogi Independent Outside Director
Atsuko Fukushima Independent Outside Director
Takahisa Takahara Independent Outside Director
Sector and Competitors
1st jan.Capitalization (M$)
CALBEE INC-10.68%3 666
NESTLÉ19.60%294 438
DANONE10.06%54 104
GENERAL MILLS30.30%29 861