[Weekend Money] "A KRW 100 Drop in the Exchange Rate Boosts Profits... Time to Buy Food Stocks"

Prolonged Decline in the Dollar-Won Exchange Rate Expected
"Increase in Grain Input Costs Limited in Won Terms"

Analysts say the food and beverage sector is set to see a clearer improvement in earnings as the stronger won eases the burden of grain costs.

According to Hana Securities on October 25, analyst Shim Eun-joo said in a recent report titled "What a Stronger Won Means and Which Stocks Stand to Benefit" that "the decline in the dollar-won exchange rate could last longer than expected as share buybacks and dividend payments by major semiconductor companies coincide." She added, "If the exchange rate remains at its current level, the food and beverage industry's cost burden next year will be lower than feared."

Hana Securities maintained its Overweight rating on the food, beverage, and tobacco sector and reiterated its Buy ratings on Samyang Foods (target price: KRW 1.8 million), CJ CheilJedang (KRW 370,000), Nongshim (KRW 540,000), and KT&G (KRW 240,000).

Lower Raw Material Import Costs... CJ CheilJedang and Daesang in Focus

Shim estimated that, if the exchange rate remains at its current level, the dollar-won exchange rate will fall year over year by 7% in the fourth quarter of this year, 9% in the first quarter of next year, and 11% in the second quarter of next year.

This is expected to stabilize raw material prices in won. In the first half of next year, the dollar-denominated input costs of the four major grains are estimated to rise year over year by 14% for corn, 28% for wheat, 18% for soybeans, and 28% for raw sugar. When converted into won, however, the increases would be limited to 6% for corn, 19% for wheat, 10% for soybeans, and 15% for raw sugar. The weaker exchange rate would thus absorb the impact of rising international grain prices.

Benefits are expected to be concentrated among small and midsize companies with overseas sales accounting for 40% or less of revenue, as well as companies with large foreign-currency liabilities. Shim noted, "If the benefits flow through to earnings, small and midsize food companies with overseas sales of roughly 40% or less are expected to benefit from the falling exchange rate." She added, "For every KRW 100 decline in the exchange rate, annual operating profit is expected to improve by KRW 17 billion at Lotte Wellfood, KRW 12 billion at Lotte Chilsung Beverage, KRW 11 billion at Daesang, and KRW 9 billion at Binggrae, in that order."

CJ CheilJedang, which has a heavy foreign-currency debt burden, was also identified as a leading beneficiary of a stronger won. For every KRW 100 decline in the exchange rate, CJ CheilJedang's consolidated net income is estimated to improve by 11%. Shim said, "Buying CJ CheilJedang and Daesang at lower prices is a viable strategy after the third-quarter earnings announcements, especially with the base effect expected to come into play next year." She added, "Binggrae, which has recently been strengthening shareholder returns, is also worth watching whenever its share price pulls back."

Export-Driven Large Caps... Samyang Foods and KT&G Are Top Picks

Large-cap companies that continue to demonstrate growth in global sales volume (Q), regardless of exchange-rate volatility, are also seen as attractive. Hana Securities named Samyang Foods and KT&G its top picks in the sector over the short to medium term, and said that Nongshim was also at a level where buying on weakness was viable.

Growth in earnings at ramen makers is expected to continue next year. Samyang Foods plans to increase its penetration of global markets by starting operations at its new plant in China next year. Following a price increase in Japan early this month, the company is also considering further price increases in global markets before the end of this year. Nongshim is also set to begin operations at its new plant in Busan at the end of this month, paving the way for a full-scale expansion into the European market. At KT&G, the completion of large-scale capital investments is expected to lead to a significant increase in the share of production overseas.

Shim added, "Samyang Foods and Nongshim will use their new plants as a springboard to further expand their global market penetration." She continued, "Expectations for KT&G's new shareholder-return policy, which is due to be announced by the end of this year, will once again be reflected in its share price, alongside the ongoing share buyback."

This content was produced with the assistance of AI translation services.