Launching Coverage of Kikkoman With Narrow Moat and Stable Moat Trend Ratings; FVE of JPY 3,450

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Equity Bottom-Up

Narrow-moat <a href="https://www.smartkarma.com/entities/11720" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman Corp (2801 JP)</a> posted a solid set of third-quarter results, as expected. While the 6.5% sales growth (4.5% excluding foreign exchange impacts) was slightly below our expectations, 15% growth (13% like for like) in operating profits came in above our estimate of 11% growth. A rebound in the wholesale margin, combined with continued double-digit growth in the domestic and overseas food sales, along with favorable exchange rates, is attributable to robust performance. The company has kept its full-year guidance unchanged, given 1) concerns over a slowdown in domestic soy milk and beverage growth from the fourth quarter; 2) recent yen strength; and 3) a delay in advertisement and promotional expenditure to the fourth quarter.We are lifting our net profit estimates by 1%-4% for the explicit forecast period to reflect lower tax rates in the U. S. and more favorable exchange rates; combined with an increase in the time value of money, this results in a fair value estimate of JPY 3,650, an increase of nearly 6% from our previous fair value estimate of JPY 3,450. Nevertheless, we view shares as overvalued because we think the positives of the tax rate cut and foreign exchange tailwinds, as well as margin expansion for domestic foods, have been fully factored into the current share price. The JPY 5 billion share-repurchase program also seems to have inflated its share performance. We are concerned that the underlying growth, boosted by a low hurdle rate and favorable exchange rates, is likely to decelerate from the fourth quarter. As we have pointed out, foreign exchange rates are a key swing factor in our estimates, as the overseas business contributes nearly two thirds of the group’s profits, with the U.S. business contributing nearly half.Analyst: Jeanie Chen

Narrow-moat Kikkoman Corp (2801 JP) posted a solid set of third-quarter results, as expected. While the 6.5% sales growth (4.5% excluding foreign exchange impacts) was slightly below our expectations, 15% growth (13% like for like) in operating profits came in above our estimate of 11% growth. A rebound in the wholesale margin, combined with continued double-digit growth in the domestic and overseas food sales, along with favorable exchange rates, is attributable to robust performance. The company has kept its full-year guidance unchanged, given 1) concerns over a slowdown in domestic soy milk and beverage growth from the fourth quarter; 2) recent yen strength; and 3) a delay in advertisement and promotional expenditure to the fourth quarter.We are lifting our net profit estimates by 1%-4% for the explicit forecast period to reflect lower tax rates in the U. S. and more favorable exchange rates; combined with an increase in the time value of money, this results in a fair value estimate of JPY 3,650, an increase of nearly 6% from our previous fair value estimate of JPY 3,450. Nevertheless, we view shares as overvalued because we think the positives of the tax rate cut and foreign exchange tailwinds, as well as margin expansion for domestic foods, have been fully factored into the current share price. The JPY 5 billion share-repurchase program also seems to have inflated its share performance. We are concerned that the underlying growth, boosted by a low hurdle rate and favorable exchange rates, is likely to decelerate from the fourth quarter. As we have pointed out, foreign exchange rates are a key swing factor in our estimates, as the overseas business contributes nearly two thirds of the group’s profits, with the U.S. business contributing nearly half.Analyst: Jeanie Chen

One-Off Positives Priced In; Shares Look Overvalued Without Significant Fundamental Improvement