Yukiguni Maitake : 1st Quarter Sponsored Research Report

Storm CORPORATE RESEARCH・ストームコーポレート

Yukiguni Maitake (1375)

Face-to-face sampling return

21st Sept 2022

Share price: ¥998

Market cap: ¥39.8bn

Weak 1Q earnings also highlighted YM's production advantage. We expect the return of face-to-face sampling to herald an earnings acceleration.

Company sector

Agricultural Operations / Food Products

(GICS Industry)

Stock data

	Price (¥)		998
	Mkt cap (¥bn)/($m)		39.8/277.1
	52-week range (¥)		814-1,614
	Shares O/S (m)		39.9
	Average daily value ($m)		0.9
	Free float (%)		49.9
	Foreign shareholding (%)		12.5
	Ticker		1375
	Exchange		Tokyo Prime

Source: Bloomberg

BUSINESS OVERVIEW

Yukiguni Maitake cultivates, processes & distributes food products. It produces maitake, eringi & other mushrooms. Yukiguni Maitake markets its products mainly in Japan & is expanding overseas.

Next event

1-on-1 meetings with President & CEO Masafumi Yuzawa: 26th, 29th & 30th Sept. Storm Corporate: [phone]

Storm corporate profile page

Yukiguni Maitake is a research client ofStorm Research

• A 1Q operating loss of -Y163m was a function of seasonally weak demand & increased mushroom output from a major competitor pushing unit prices down, with rising input costs further compressing margins.
• Full year forecasts remain unchanged as management is confident it accounted for negative 1Q factors within its FY 3/23 budget. We also note 1Q OP typically represents only a few % of the full year total, with peak season 3Q & 4Q earnings thus more significant for FY 3/23 forecasts.
• In context of easing COVID restrictions, we regard the gradual return of a key domestic promotion channel, face-to-face food sampling at retailers, as positive. Similarly, we expect the company's long-term overseas expansion to pick up as travel restrictions are relaxed.
• 1Q mushroom oversupply & weaker prices reflected production capacity increases at 2 competitors just as seasonal demand was at its weakest. In contrast, YM has developed production capacity that can adapt to seasonal demand, highlighting a key competitive advantage. In addition, it sells through retail channels where pricing is more stable.
• The Aug 2022 launch of new product white maitake is the culmination of 6 years' development, including large-scale production capacity. Whilst the initial earnings impact in FY 3/23 is likely to be limited, higher unit prices & a lower cost production process bode well for longer term margins.

• On 14x the company's FY 3/23 estimates, following a -55% decline since its Sep 2020 IPO, we believe the stock has discounted weaker recent earnings but is currently ignoring the company's long-term growth potential. We encourage investors to book a 1-on-1 call with President & CEO Masafumi Yuzawa on 26th, 29th or 30th Sept: here.

Year end	3/2021	3/2022	1Q 3/23	3/2023E
Total Income (¥bn)	51.4	47.1	8.2	48.1
OP (¥bn)	7.8	5.0	-0.2	4.9
Core EBITDA (¥bn)	10.2	7.6	0.7	7.2
NP (¥bn)	4.7	3.0	-0.2	3.0
EPS (¥)	119.0	74.9	n/a	74.0
DPS (¥)	42	30.0	n/a	30.0
Total Income growth YoY (%)	1.2	-8.4	-8.2	2.1
OP growth YoY (%)	16.9	-36.4	n/a	-1.6
NP growth YoY (%)	9.2	-37.0	n/a	-1.3
EPS growth YoY (%)	0.0	-37.1	n/a	-1.0
PER (x)	16.6	15.2	n/a	13.5
EV/EBITDA (x)	9.3	7.4	n/a	7.8
EV/Sales (x)	1.8	1.2	n/a	1.2
PBR (x)	8.5	4.4	n/a	4.2
ROE (%)	67.1	30.3	31.1	n/a
ROIC (%)	18.1	11.2	10.9	n/a
Core EBITDA mgn (%)	29.6	23.3	10.6	20.9
Dividend yield (%)	3.4	3.4	2.9	2.9	* Source:
					Bloomberg

Storm CORPORATE RESEARCH・ストームコーポレート

RESULTS VS

FORECAST HISTORY

• Listed on 17th Sep 2020.
• 3/21 Original OP CoE was announced at 1H 3/21 results.

EARNINGS

Yukiguni Maitake posted an operating loss of -Y163m in the seasonally small 1Q, which followed a -Y475m operating loss in 4Q FY 3/22. For comparison, 1Q FY 3/22 OP was Y201m versus FY 3/22 OP of Y4.98bn, i.e. just 4% of the annual total, emphasising that 1Q results may not be significant for the full year outlook. For comparison, the 1Q total income figure in FY 3/22 was 19% of the full year total.

Against a backdrop of weak consumer spending & rising temperatures causing consumers to avoid foods that require cooking, as well as a combination of competition-induced falling prices & rising costs squeezing margins, 1Q total income was Y737m lower YoY & costs Y152m higher. Management had foreseen both factors to some extent & has therefore not revised its 1H or FY forecasts.

• New competitor plant: One rival (Hokuto) opened a new plant that reached full capacity during 1Q, just before the seasonal summer low point in demand, driving down open market prices. YM has the ability to adjust its output according to seasonal demand whereas its rival's new facility does not have the same level of flexibility. Whilst this may temporarily reduce YM's market share during the summer months, it aims to manage its own output to control costs & pricing.
• Costs: The YoY rise in costs was partly raw materials but mostly utilities, which had already been increasing at the start of 2022. YM had allowed for this in its budget & therefore sees no need to adjust its full year forecasts at this stage.

With regard to 1Q cost-cutting measures, YM partly offset higher costs by optimising procurement of fuel & raw materials, as well as improving its production process with measures such as reducing waste, but in aggregate its ability to react was limited given the rise in costs was mostly due to external factors.

Yukiguni Maitake (1375) / 21 Sept 2022

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Storm CORPORATE RESEARCH・ストームコーポレート

Whilst 1Q gross profit declined -20%YoY from Y2bn to Y1.6bn, the company posted a 1Q operating loss of -Y163m, versus 1Q FY 3/22 OP of Y201m, despite a Y38m YoY reduction in SG&A to Y1.8bn

Management's preferred indicators, Core OP, Core EBITDA & Core EBITDA margin, all declined YoY in the 1Q. Core OP, which is adjusted for IAS41 (IFRS Agricultural Accounting), temporary & one-off items & 'other' income & expenses, declined -68.9%YoY from Y560m to Y174m; Core EBITDA fell -35.3%YoY to Y672m; & the Core EBITDA margin dropped -5.2ppt YoY to 10.6%.

We note the IFRS fair value (IAS41) impact was negative in the 1Q due to the decline in market prices between Mar-Jun,reflected in lower inventory revaluations at the end of the period. There was a -Y302mimpact on sales & a -Y27mimpact on COGS. After other adjustments, the overall effect was to reduce OP by Y304m.

MUSHROOM BUSINESS

(JPY Millions)	1-3Q	YoY	3/22	YoY	1Q 3/23	YoY	3/23	YoY
	3/22		Results		Results		CoE
	Results
- Maitake	13,905	-7.4%	18,732	-6.2%	3,409	-0.7%	20,400	8.9%
- Eringi	2,418	-8.1%	3,161	-7.5%	752	-3.3%	3,270	3.4%
- Buna shimeji	4,612	-8.3%	6,328	-7.2%	1,344	-4.1%	6,350	0.3%
- Other	2,956	2.4%	3,799	0.2%	765	-10.2%	n/a	n/a
mushrooms
Total Revenue	23,891	-6.5%	32,020	-5.8%	6,272	-3.0%	n/a	n/a
OP	5,373	-24.0%	4,884	-37.1%	-176	n/a	n/a	n/a
OPM	22.5%	-5.2%	15.3%	-7.6%	n/a	n/a	n/a	n/a

• Maitake: 1Q sales declined -0.7%YoY to Y3.4bn. YM continued its collaborations with other food makers & its social media campaigns to provide recipe ideas. Sales volume increased +0.1%YoY but was 2.4% below plan, whilst pricing declined -2%YoY & was 6% below plan due to increased output at the rival firm noted above.

It is worth noting that although market prices were weak during the quarter, & continue to be so, YM's unit price is perhaps approx. double its rivals due to its high ratio (80%) of direct sales. It also continues to make headway in pre-cooked food for takeaway meals & bento, including fried products & items that can be steamed.

The average 1Q maitake market price was Y477/kg versus Y565/kg in 1Q FY 3/22 & Y758/kg in 1Q FY 3/21. 1Q market volumes rose sharply to 672 tons versus 534 tons in 1Q22 & 500 tons in 1Q21.

• Eringi: YM made a conscious change to its Eringi sales strategy, altering the packaging & package contents to improve unit pricing. Although 1Q sales fell -3.3% YoY to Y752m, driven by a -7.2%YoY decline in volume, the decline was partially offset by a +3%YoY rise in prices. Whilst the volume decline was worse than plan, pricing was marginally better.
• Bunashimeji: Unit pricing was also better than plan, although volume & prices declined YoY due to the increased competition cited above. Overall sales value fell -4.2%YoY to Y1.3bn, with volumes -2.8%YoY & pricing -2.3%YoY.

Yukiguni Maitake (1375) / 21 Sept 2022

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Storm CORPORATE RESEARCH・ストームコーポレート

• Other mushrooms: Accounting for 12% of 1Q revenue, 1Q revenue declined -10.2%YoY to Y765m, driven by a -9.7%YoY decline in volumes & a -1%YoY fall in unit prices. Volumes in button mushrooms were held back by temporary production issues which meant YM's output could not fully meet demand.

Button mushrooms are mostly produced by subsidiary Mitsukura Norin, which is currently undergoing investment to raise its annual capacity by 30% from its level in FY3/21 tons. Button mushrooms remain a key area of focus for YM's growth plans.

OTHER BUSINESS

FY 3/23 OUTLOOK

(JPY	1-3Q 3/22	YoY	3/22	YoY	1Q 3/23	YoY
Millions)	Results		Results		Results
Revenue	331	-15.6%	422	-22.9%	95	-20.8%
OP	74	-28.2%	90	-34.3%	11	-47.6%
OPM	22.4%	-3.9%	21.3%	-3.7%	11.6%	-5.9%

While a small category, Other Business generated 1Q revenue of Y95m -20.5%YoY. Products included sales of processed health food & sales of culture medium activator by subsidiary Mizuho Norin.

Despite the apparent weak 1Q, there are positive signs for the FY outlook. One of YM's main sales promotion channels, offering taste tests to consumers in supermarkets, is starting to open up again, which the company considers a key strategy to winning new customers & converting them to become regular product buyers.

Joint promotions & collaborations with industry partners continue to develop & are building up towards the peak demand season of the 3Q. YM has been striving to develop a presence in semi-prepared food, among other channels, & also has a successful collaboration with Marugame Seimen of the Toridoll Holdings group, an udon noodle restaurant chain which offers take-away items.

The collaboration represents another version of its strategy to raise brand awareness & encourage consumers to appreciate different ways of enjoying maitake, or to engage with consumers who might not otherwise have thought of eating maitake.

Maitake revenue is still projected to grow +9.0%YoY to Y20.4bn in FY 3/23, eringi +3.5%YoY to Y3.3bn & bunashimeji +0.5%YoY to Y6.4bn. Other mushrooms & other product revenue combined are forecast to increase +4.2%YoY to Y4bn. As referenced above, cost projections remain deliberately conservative, including a +9.5%YoY increase in COGS to Y20.4bn & a +11.3%YoY rise in SG&A to Y9.1bn.

Management believes its full year cost estimates are sufficiently conservative for there to be no concern for the time being. From a longer-term perspective, the easing of travel restrictions means its overseas expansion can again become a focus of attention & progress is back underway in Malaysia & Singapore, with products in the final stages of package design ready for sales to begin later this year. YM has identified a distributor & is in

Yukiguni Maitake (1375) / 21 Sept 2022

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Storm CORPORATE RESEARCH・ストームコーポレート

WHITE MAITAKE

NEW BUSINESS DIVISION

BALANCE SHEET

ACCOUNTING POLICIES & IFRS IMPACT

direct contact with premium food retailers regarding pricing levels. Rival Hokuto is already selling into these markets, with YM able to use its rival as a reference point.

Aug 2022 saw the launch of new product white maitake. YM has spent 6 years developing it, reflecting the technical difficulties of cultivating such a delicate item & building up large- scale production. We anticipate a limited initial impact as production & sales ramp up but expect full scale production & a small but measurable financial impact in FY 3/24.

Management comments that unit prices are set to be higher than current typical mushroom prices &, margins ought to be particularly high. As a unique product with rarity value, we believe white maitake may garner attention & potentially attract new consumers.

Since the product was announced in May, the company has noted a positive response from distributors & retailers, as well as strong interest from consumers, even before its sales launch in August. Furthermore, as a premium product it will facilitate higher average unit prices along the distribution chain. Management also believes that white maitake has the potential to cross over into Western food menus, for example pasta dishes with white sauce, & may become more popular overseas than brown maitake.

During the 1Q, YM announced the establishment of a new business section. In particular, it will focus on developing ideas such as mushrooms as an alternative source of protein to replace meat consumption. Mushrooms have a number of advantages over soy, for example higher dietary fibre content, for this purpose.

There were no major changes in the balance sheet or associated company policy in the 1Q. YM continued to pay down debt, in line with its strategy, reducing long-term borrowing by Y700m to Y16.6bn versus end March levels. The reduction was partially offset by an increase in short- term borrowing of Y500m.

The net debt/equity ratio has deteriorated slightly since March, from 1.4x to 1.8x, despite the fall in debt, as cash & equivalents also declined. Similarly, the net debt/Core EBITDA ratio worsened due to lower profitability.

YM decided to adopt IFRS accounting since before it listed, as it always intended to expand globally & believed adopting international standards was the most appropriate policy with regard to M&A activity & appeal to global investors.

Under IFRS agriculture accounting, profit is recognised before sale, whereby the product increases in value as it grows & profit is recognised in tandem with the growth. The ongoing value of the product is then revalued as appropriate based on fluctuations in market price. The impact of revaluations is evident in the sales price, in COGS & in inventory held on the balance sheet. The ultimate impact on profits is typically insignificant as the timing gap on recognition of costs is eliminated at the time of sale.

Yukiguni Maitake (1375) / 21 Sept 2022

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