Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: KDDI Corp, Yum China Holdings, Inc, Macy’s Inc, BASE Inc, Mitsubishi Heavy Industries, Ichitan Group, Wice Logistics, XP Inc, Internet Initiative Japan and more

In today’s briefing:

  • KDDI (Buy) Q4 21 Results Reaction: FY22 Profits Steady and Wide-Ranging Mid-Term Plan
  • Yum China (YUMC.US): COVID-19 Headwind Will Have More Impacts in Q2
  • KDDI (9433) Results OK, Forecasts OK, Buyback Even Better, But No Longer Cheap
  • Macy’s: Amid Global Uncertainties, a Special Situation in an Out of Favor Sector
  • Base Inc: Shoppers Return to Offline, More Downside Left
  • Mitsubishi Heavy (7011 JP) | Just Getting (Re)Started
  • ICHI: Disappointing 1Q22 Result Already in the Price
  • WICE: Earnings Still Continue to Expand in 2022 with Potential Upside
  • XP (XP US) – Less Demanding Valuations, but the Overhang Still Weighs
  • IIJ (Buy) – Q4 21 Results Reaction: Reliable Growth and Margin Expansion

KDDI (Buy) Q4 21 Results Reaction: FY22 Profits Steady and Wide-Ranging Mid-Term Plan

By Kirk Boodry

  • Guidance for modest growth in FY22 operating income is broadly in line with expectations and reassuring after a range of potential outcomes in reports from NTT and Softbank  
  • The company has issued a mid-term plan with a positive message on growth from new businesses and in-line guidance for capex/shareholder returns but a lack of FY24 finanical targets
  • On balance, the message is positive as a stable business and rising shareholder returns makes KDDI an attractive option in a frothy market

Yum China (YUMC.US): COVID-19 Headwind Will Have More Impacts in Q2

By Roger Xie

  • Yum China Holdings, Inc (YUMC US) delivered a better-than-fear 1Q22 results helped by its strong execution. KFC delivered solid margins above expectations given its store format and take-out service.
  • China COVID outbreak is getting worst, we expect 3000 stores will cancel dine-in service in April (compared with 1700 stores in March). Yum China might have deeper loss in 2Q22. 
  • We continue to think Yum China is the best-run restaurant chain in China. It has resilient business model to navigate through pandemic. Risk/reward is more compelling to own Yum China.

KDDI (9433) Results OK, Forecasts OK, Buyback Even Better, But No Longer Cheap

By Travis Lundy

  • KDDI reported earnings today, offering a near meaningless March 2022 results presentation slide deck, and an only slightly more meaningful new Mid-Term Plan.
  • The only clarity provided is on the bit which makes up about a third of future OP as the two-thirds (mobile telephony ARPU-related revenues) will see considerable pain this year. 
  • The buyback is nice, but KDDI is no longer cheap, and may have relative upside only against Softbank Corp. 

Macy’s: Amid Global Uncertainties, a Special Situation in an Out of Favor Sector

By Howard J Klein

  • Amid ghost malls of closed stores across the US, this reimagined middle class retail legacy operator has transformed itself and become a special situation buy at its price.
  • With 794 stores  in all major cities, Macy’s can move smartly up as global pandemic pressures begin to ease and bearish macro events like the Ukraine war find resolution.
  • Current market cap does not reflect impressive transformation of its business model management has put in place that shows in FY 2021 and promises better in 2022.

Base Inc: Shoppers Return to Offline, More Downside Left

By Oshadhi Kumarasiri

  • BASE Inc (4477 JP) is up more than 27% today as the Mothers Index bounced back 4.5% following a steep sell-off during the last one-month period.
  • Nevertheless, results were disappointing on both the top line and the bottom line with Q1 revenue and operating loss of ¥2,512m (consensus ¥2,659m) and ¥272m (consensus ¥139.2m) respectively.
  • After disappointing the market with a guidance range that was significantly below consensus in 2021, Base Inc has withheld from providing 2022 guidance.

Mitsubishi Heavy (7011 JP) | Just Getting (Re)Started

By Mark Chadwick

  • MHI reported a strong 7% growth in the order backlog to ¥5,500 billion
  • MHI is a beneficiary of the global energy crisis, geared into gas turbine and nuclear supply chains
  • The stock is trading below book value (10 year average 1x) at a time when the core energy order book is as strong as ever

ICHI: Disappointing 1Q22 Result Already in the Price

By Pi Research

  • ICHI reported 1Q22 net profit at Bt104m (-15%YoY, -22%QoQ). The 1Q22 result came out lower than our expectation.
  • Excluding one-time tax items of Bt24m,1Q22 norm profit was at Bt128m(+5.4%YoY). The YoY and QoQ drop in earnings mainly from a contraction in gross profit margin to 14.7% in 1Q22 
  • We expect 2Q22 earnings to recover QoQ from high season quarter. Revised down 2022 earnings by 18% to 20% in 2022-23E to factor in rising cost.

WICE: Earnings Still Continue to Expand in 2022 with Potential Upside

By Pi Research

  • Expect impact from an expected drop in sea freight rate (50% of WICE revenue link to this freight price) is likely to be offset by an increase in cross border
  • We have factored in impact from China border restriction and a gradual drop in sea-air freight,which we anticipated to normalize to pre-COVID-19 gradually.Our revenue forecast at Bt8.2bn is on conservative
  • WICE report 1Q22 net profit at Bt158m (+93%YoY and -13%QoQ). QoQ contraction from all-time high level in 4Q21 was due to a drop in air freight and cross border revenue

XP (XP US) – Less Demanding Valuations, but the Overhang Still Weighs

By Victor Galliano

  • Itaú Unibanco’s acquisition of an 11.36% stake in XP in April is no strategic move; it is a contractual obligation that remained, after the regulator blocked Itaú’s acquisition plans
  • This adds to the existing overhang in XP shares, given that fellow XP shareholder Itausa deems its 11.5% XP stake to be non-strategic, having already made disposals through block trades
  • We remain cautious on XP shares based on the disposal overhang and competitive pressures in Brazilian wealth management undermining XP’s fundamentals; near term, Itausa warrants monitoring on its NAV discount

IIJ (Buy) – Q4 21 Results Reaction: Reliable Growth and Margin Expansion

By Kirk Boodry

  • Q4 and FY22 guidance beat driven by growth in corporate DX demand and margin discipline
  • Company expects FY22 double-digit revenue growth as mobile headwinds fade and has re-set its mid-term profitability target. Implied FY23 OP is 28% higher than year-ago forecasts
  • Near-Term profitability beat ties in to shareholder returns and FY21 DPS has been raised to ¥48 from ¥46 with further growth in FY22. We remain at Buy.

Related tickers: KDDI Corp (9433.T), Yum China Holdings, Inc (YUMC.N), KDDI Corp (9433.T), Macy’s Inc (M.N), BASE Inc (4477.T), Mitsubishi Heavy Industries (7011.T), Ichitan Group (ICHI.BK), Wice Logistics (WICE.BK), XP Inc (XP.OQ), Internet Initiative Japan (3774.T)

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