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On Wednesday, JPMorgan initiated coverage on Yamazaki Baking (2212:JP) stock, Japan's leading bread producer, with an Overweight rating and a price target of JPY3,850.00. The firm highlighted the company's dominant market position, holding a 57% share as of the fiscal year 2022, inclusive of the acquisition of Kobeya.
The analysis by JPMorgan pointed out the challenges faced by the bread-making industry, particularly the labor-intensive nature of the business and the necessity to offset increasing fixed costs due to wage inflation through sales growth and price hikes. Yamazaki Baking has announced its intention to raise prices for bread products starting from January 2025, a move designed to address rising personnel costs rather than ingredient prices.
The report forecasts a 12% year-over-year increase in operating profit for Yamazaki Baking in the fiscal year 2025, suggesting that the planned price hikes will more than compensate for the impact of higher fixed costs and other potential negatives. According to the analysis, the company's shares are trading at a fiscal year 2025E price-to-earnings (P/E) ratio of 13 times, based on the closing price on December 9, which is noted as the lowest since the 2011-2012 period of food deflation.
JPMorgan's assessment underscores the current food inflation scenario, contrasting it with the past deflationary period, and posits that Yamazaki Baking's stock appears significantly undervalued. The firm anticipates that sales trends in January 2025, which are expected to be clarified with the fiscal year 2024 earnings announcement in February, will act as an upside catalyst for the company.
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