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

Suntory Beverage & Food

14/03/2019 07:38

* Food sector has underperformed broader market
    * Mizuho say 20 food cos' operating profits Dec qtr fell 5
pct y/y

    By Ayai Tomisawa
    TOKYO, March 14 (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  .IFOOD.T  have only added 2.8 percent
this year, compared with a 7.5 percent gain in the Topix
 .TOPX , which in turn underperformed the world's many other
equity indexes.
    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  2579.T , Suntory Beverage & Food  2587.T  and
potato chips maker Calbee Inc  2229.T , 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.
        
    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  ITEQP.T .
    "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."

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Topix sectors    https://tmsnrt.rs/2F8BI2A
Japan food companies    https://tmsnrt.rs/2F8nC19
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 (Reporting by Ayai Tomisawa; Editing by Sam Holmes)
 ((ayai.tomisawa@thomsonreuters.com; 81-3-6441-1875; Reuters
Messaging: ayai.tomisawa.thomsonreuters.com@reuters.net))