Japan: Asahi Group shares headed for more upside

Already hovering at an all-time high, shares in Asahi Group Holdings are headed for more upside as Japan's largest beer maker looks set to post a record full-year profit, fund managers say, the Nikkei Asian Review reported on November 15.

Since January, Asahi shares have soared nearly 50% to 5,336 yen, pushing its market capitalization over 2.58 trillion yen ($22.6 billion). This is about 160 billion yen higher than that of its rival Kirin Holdings as of November 14.

The company raised its full-year net profit projection to 110 billion yen in August, up 23% from the previous year. It is now expected to beat that forecast, as the group has already achieved 90% of the revised profit forecast by end-September.

"For the food sector, we are receiving an increasing number of inquiries about Asahi from overseas clients," said a source at a Japanese asset management company. Asahi shares briefly reached 5,510 yen on Nov. 6, refreshing their all-time high.

This year's relatively cool and rainy summer did not hit beverage sales as feared as Asahi's financial figures proved. It said earlier this month that group net profit rose 68% on the year to 98.8 billion yen, a record high for the nine months to end-September. The group's domestic operations, which account for 70% of total sales, did well. Both sales and profit increased for the group's beverage business, despite a fall in beer sales.

The maker's soft drink products are increasingly supporting the entire group's performance. The company's focus on promoting and advertising key products, such as the Wilkinson soda drinks and the Calpis lactic acid drinks, has helped lift overall results.

The soft drink unit's profit margin stood at 11% for the nine-month period, up 2 percentage points on the year from 9%. The soft drink business is now robust enough to offset poorer performances by the beer business which has been on a downtrend.

"It's a positive story that a business line that was considered struggling has managed to increase profit," said Satoshi Fujiwara, an analyst at Nomura Securities. Fujiwara also pointed out that Asahi has also strengthened its cost-management capability.

Investors also like Asahi's recent purchases of European beer businesses, as the company signalled earlier this year that it was looking to invest more overseas as it recalibrates its business. On Nov. 2, it announced the sale of chilled beverage subsidiary LB to an investment fund. The announcement followed a flurry of similar activities, including the sale of Asahi's shareholdings in Tingyi-Asahi Beverages Holding, a major Chinese beverage producer, to its joint venture partner Tingyi Holding, as well as the sale of its shares in Tsingtao Brewery and the Indonesian business.

Borrowing to finance acquisitions in Europe boosted Asahi's interest-bearing liabilities to 2.2 trillion yen. Some market participants take it positively, however, with Fujiwara saying "European acquisitions have prompted the company to quickly proceed with shrinking the balance sheet, so I expect the company's financial health will improve going forward.”

A challenge facing Asahi is how to raise the overall group's profit margin to the level of major overseas rivals. The company aims to increase its pre-alcohol tax base sales-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio by about 2 percentage points from the previous year to 17.8% this fiscal year. Yet it is still far below the 38% reported by Anheuser-Busch InBev of Belgium, the world's largest brewer, as of end-September. Asahi will need to cut costs and review its operations further if it is to lift the ratio substantially.

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