Ajinomoto: Food, Biotech, And Semis All-In-One Summary Ajinomoto is diversifying its revenue segments, particularly in the biopharma and semiconductor industries, for organic growth opportunities. The company has a leading market position, high R&D investment, and above-peer margins in the consumer staples segment. Ajinomoto’s operational growth catalysts include expanding into healthcare and material science activities, particularly in contract manufacturing services for biopharma partners, and its unique insulating material for the semiconductor market. Introduction Ajinomoto Co., Inc. (OTCPK:AJINY) has had great operational improvements over the past decade. Now, the company is pushing hard into diversifying revenue segments with their decades of experience producing amino acids. Thankfully, their expertise allows them to move into the biopharma and semiconductor industries for organic growth opportunities. With this, I expect continued organic growth, increasing (and stabilizing) margins, and significant shareholder return. This article will highlight the opportunity for long-term investors, including finding the right entry point and setting realistic expectations. Amino Acid Leaders Ajinomoto first came to the forefront of global food production in the early 20th century after discovering “umami” taste by isolating amino acids from kelp dashi (broth). After discovery, the company quickly became a global entity selling seasonings such as dehydrated soups and MSG, with this food segment still generating over two-thirds of all yearly revenues. However, in the latter half of the 20th century, R&D led to the expansion of Ajinomoto’s amino acid expertise into healthcare functions, due to the obvious critical role of amino acids in the body, and even the semiconductor industry thanks to a unique insulating film discovery. Although over 66% of sales currently come from consumer staples items such as seasonings and foodstuffs, legacy financial performance is solid in its own right. There are many qualitative factors I can cover to showcase how dominant Ajinomoto is, despite not being a household name. According to Morningstar, the following points are most important: Ajinomoto sells one flagship product at a 70% premium to comparable products sold by peers. More than 2% of sales are invested in R&D annually compared with 1-2% of peers. Also, they hold over 50% market share even in non-Japanese markets such as Thailand, Vietnam, Philippines, Brazil, and Indonesia. And, the company’s leading margins (over 10%) for a Japanese food company come from cost advantages of a strong global logistics network. While the consumer staple segment is incredibly strong on its own, management is now leaning heavily into the even more lucrative high-tech revenue segments for future growth opportunities. This is the main factor in my newfound interest in Ajinomoto, particularly after one major acquisition that was announced recently. With a goal of having non-food, high tech sales at a 1:1 ratio with the legacy products by 2030, I expect the latter half of the decade to provide enough clear operational catalyst for investors to benefit from, even with economic risks factored in. Then, when the company is further diversified down the road, I believe that Ajinomoto will have enough new assets in place to provide stable, predictable growth for long-term investors. But, now is the time to take the risk of diving in early before the full transformation is complete. Operational Growth Catalysts While the consumer food business is consistent, although slow growth due to the high exposure to Japan’s declining population issues, Ajinomoto has taken strides the past few years to become a more value-added business. This has included divesting commoditized segments and investing in more technical, high margin, secular opportunities such as frozen foods and healthcare services. And, thanks to Ajinomoto’s established position and partnerships with global giants such as Nestlé S.A. (OTCPK:NSRGY) and Unilever PLC (UL), there is an easier path for the company to remain dominant while shipping innovative new products. However, we remain at the early stages of the reorganization and management has certainly taken a conservative approach so far. Therefore, at the right price, investors can find an opportunity that is low risk based on current operations, plus the added benefit of future improvements. The first major improvement for Ajinomoto is for healthcare and material science activities involving amino acids. Most important at the moment is the raw fermentation and isolation of various amino acids for supplemental use, but there are increasingly important pharmaceuticals that require Ajinomoto’s production skills. Importantly, Ajinomoto is moving into providing high moat contract manufacturing services (CDMO) for biopharma partners, and this undoubtedly provides higher quality revenues than in the past. I believe high quality CDMOs and the ilk are one of the better investment areas of the market thanks to customer stickiness with long-term contracts, the requirement for intense quality control leading to barriers to entry, and the favorable margins that can be earned. As of before late 2023, the major biopharma expertise of Ajinomoto revolved around four modalities: oligonucleic acids, proteins, ADCs, and mRNA vaccines. I have articles discussing the various benefits of many of these modalities, especially ADCs. However, apart from the sale of pure amino acids, most of these segments remain in the less lucrative R&D and clinical stages. For example, Ajinomoto has recently announced a partnership with Exelixis, Inc. (EXEL) regarding using AJICAP for their ADC therapies. Also, a CDMO contract was recently announced with AstraZeneca PLC (AZN) for unknown therapies, and will provide final fill services. Along with the research partnerships, Ajinomoto has also recently announced the key $620 million acquisition of Forge Biologics, a viral vector and cell therapy CDMO. Forge will provide Ajinomoto with a brand new US-based manufacturing facility and partnerships with early stage cell therapy companies, an area with huge discovery potential awaiting. This is similar to the company’s research into oligonucleic acid therapy development. These novel cures have many benefits over traditional therapies such as lower side effects and higher efficacy due to targeting capabilities, and there is even the chance to change our bodies DNA and RNA structure for genetic issues. As a new area of research for the healthcare market, there is still plenty of research that needs to be performed, and the bets remain speculative. However, Ajinomoto will gain revenues from the research partnerships, and will earn huge cash flows if any of these partners ever achieve approved therapies. Then, the positive reinforcement loop begins leading to decades of high quality cash flows to reinvest into the next big therapeutic area. While the healthcare market is beginning to shine already for Ajinomoto, a smaller revenue segment has one very unique qualitative factor: a 95% market share over a single product across the entire semiconductor market. This is in regards to the company’s Ajinomoto special insulating material, ABF. As summarized by a Quartz article: During the covid-19 pandemic, Ajinomoto, the maker and inventor of the food seasoning called monosodium glutamate (MSG), found its profits booming. But that wasn’t necessarily because people were buying out stocks of MSG to add it to soups, stir fries, and other lockdown comfort food. Instead, the company’s sharp growth was driven by the manufacturing of a niche yet powerful material called ABF, short for Ajinomoto build-up film substrate. ABF insulates the central processing units (CPUs) that power the functions of computers. More than 90% of personal computers have ABF insulating their processors – a wild, unexpected diversification for a company that got its start 113 years ago in Japan marketing a seasoning full of umami flavor. This unique, yet profitable diversification for Ajinomoto is just one example of the potential of amino acid material science innovation. While there is a major risk of competition, or ABF being phased out in the semi manufacturing process, this is unlikely for at least the next decade according to Morningstar research. To combat the risk, Ajinomoto has begun lobbying in various semiconductor research consortiums such as IOWN, a global forum for IT and communications research worldwide and founded by Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY), Intel Corporation (INTC), and Sony Group Corporation (SONY). Also, Ajinomoto already has communications with all relevant computer hardware manufacturers worldwide, so discussions about the materials that will be needed in the future are already underway. I expect this segment to remain both profitable, and growing fast, with the current boom of data centers and AI technologies only adding to the bullish sentiment. Quantitative Report Ajinomoto has many key operational qualities that make for both a case of historical investment, but also an improvement in quality in the future. Food sales will always be the profitable, low risk foundation that investors can rely on, but management is expecting a 3x increase in EPS generation by 2030. That relates to over 14% growth per year from 2022 levels. This is exactly in line with the current 10-year historical EPS growth as of November 2023, but I believe that estimates may be quite conservative if new innovations are successful. This historical growth has been the result of the slow operational changes I have discussed, and the success over the past decade is why I believe the company can continue improving. By looking at the chart below, it is clear to see how, while more volatile due to investments, profit margins are steadily trending upward. Even with the difficulties of the pandemic, supply chain hang ups, inflation, etc, Ajinomoto has done well to steadily improve despite some calls that the changes are taking too long. But, I prefer slow and steady rather than risky maneuvers. Another great quantitative factor that supports the long-term success of Ajinomoto’s maturation is that the balance sheet remains extremely strong. This is not like other Japanese conglomerates that can be tied down with excessive leverage, despite the relatively low local interest rates. At a current 1.0x net debt/EBITDA ratio, Ajinomoto has plenty of leeway to invest in growth. One example of this flexibility being put to use is the recent acquisition of Forge Biologics, which is not yet reflected in the financials. We also see other shareholder friendly practices such as a reduction in overall shares outstanding and an increase to the dividend. However, all of these improvements have also lifted the valuation of the company. Valuation With that, we have come to the major low point of the Ajinomoto thesis. The company is currently trading close to an all-time high valuation, albeit justly so. However, this limits the current upside potential for investors, especially if the market and economy remain volatile and uncertain. The only factors that I use for support at current prices are the mean EV/EBITDA and P/S values compared to the mean P/E. As profit generation has increased significantly, the P/E remains close to mean historical value, while the P/S and EV/EBITDA are about twice the norm. While 2020 and earlier was the best time to begin the trade, I believe that with recurring investments, there is enough long-term opportunity for investors at current levels. As an example, with 14% expected annualized earnings growth, but a slightly high current valuation, Ajinomoto’s share price still has the opportunity to increase over 10% per year on average in the case that the valuation falls below 30x (TTM). The major factors that will keep the valuation high moving forward are the exposure to the semi market continuing to support secular growth speculation, the success of current operational changes in lifting profit margins (and the continued success), along with the hidden factor in the food business of global growth opportunities. There are many catalysts, and as revenue growth remains in a linear organic growth phase, rather than cyclical, I believe the share price will continue to climb. However, right now at the peak is certainly risky so I have set personal limit orders around $33 and $30 per share, or the mean P/E of 28, and slightly below. I expect these to possibly be met over the next three months, and if not, I will invest on a recurring weekly basis. Conclusion Ajinomoto has a lot of positive factors going for it. I personally find the diversification into healthcare and materials science to be an excellent opportunity, but the risk of failure still remains. Due to that fact, I believe that low-risk investors may be better suited waiting until the CDMO business is more established with approved therapy revenues, rather than R&D revenues. As CDMO’s increase in age and size (with successful operations), the risk falls. Just think Thermo Fisher Scientific Inc.’s subunits PDD/Pantheon (TMO), WuXi Biologics (Cayman) Inc. (OTCPK:WXXWY), and Lonza Group AG (OTCPK:LZAGY). Then, the sole reliance on ABF for the semi industry will be hopefully diversified by the time the CDMO matures. And, that is not even mentioning continued divestments and improvements in the high-moat consumer foods business. By 2030 I believe Ajinomoto will be a much different company. While I believe investors will benefit greatly until then, I do recognize that the play is more on the speculative side and I will keep the bet as a smaller portion of my portfolio. Although, I do look forward to it growing into a major holding. Thanks for reading. 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