Company Reports

We reduced our fair value estimate for Nippon Telegraph and Telephone, or NTT, to JPY 172 per share from JPY 176 following a third-quarter fiscal 2023 result (quarter-ended December 2023) that was below our expectations. Our narrow moat rating for NTT based on efficient scale is also retained with the firm now earning ROIC above WACC. We see the shares as broadly fairly valued at these levels.

NTT is an anomaly in the telecom world. It owns a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on continuing to extract synergies from this consolidation in areas such as merging management, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies. NTT DoCoMo has also made several decisions to significantly lower pricing, in 2014, 2019, and 2021 that had significant impact on its earnings. However, with NTT also consolidating of its international businesses with NTT Data we see further potential synergy and cost-reduction opportunities which should help offset the effects from what has been at times a difficult mobile market.

Narrow-moat NTT has held in investor day, focusing on two of its businesses, NTT global data centers and the smart energy business. As a recap, NTT plans to increase its EBITDA by 40% over the next five years from JPY 1.3 trillion in fiscal 2022 to JPY 1.8 trillion by fiscal 2027. NTT’s global data center business is expected to contribute around 20% on the incremental consolidated company growth target, with its EBITDA expecting to grow from JPY 80 billion in fiscal 2022 to JPY 180 billion by fiscal 2027. The smart energy business is tasked with helping NTT meet its target of level 3 carbon neutrality by 2040. We make no changes to our existing forecasts or our JPY 176 per share fair value for NTT. The company looks broadly fairly valued at these levels.

NTT is an anomaly in the telecom world. It owns a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on continuing to extract synergies from this consolidation in areas such as merging management, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies. NTT DoCoMo has also made several decisions to significantly lower pricing, in 2014, 2019, and 2021 that had significant impact on its earnings. However, with NTT also consolidating of its international businesses with NTT Data we see further potential synergy benefits which should help offset the effects from what has been at times a difficult mobile market.

Narrow-moat Nippon Telegraph and Telephone's, or NTT’s, fiscal-2022 result (year ended March 2023) was in line with our expectations on profitability and better than expected on revenue. Full-year revenue grew 8.1% with operating profit increasing 3.4%, while fourth-quarter revenue and operating profit grew 10.2% and 35% year on year, respectively. The strongest segment was global solutions with operating profit up 26% for the full year and 83% year on year in the fourth quarter. The weakest business was the regional communications businesses (NTT East and NTT West) where operating profit declined by 4.4% for the full year mainly due to the JPY 50 billion in benefit to the previous period from the Olympics not in this period. NTT DoCoMo’s consumer business also experienced operating profit decline by 2.7% for the full year as a result of price declines, but fourth-quarter operating profit was up 25% and the company is guiding to 1.8% growth in operating profit from this segment in fiscal 2023. Surging electricity prices have also affected the traditional telecom network businesses by around JPY 15 billion in each quarter this year.

NTT is an anomaly in the telecom world. It owns a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on continuing to extract synergies from this consolidation in areas such as merging management, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies. NTT DoCoMo has also made several decisions to significantly lower pricing, in 2014, 2019, and 2021 that had significant impact on its earnings. However, with NTT also consolidating of its international businesses with NTT Data we see further potential synergy benefits which should help offset the effects from what has been at times a difficult mobile market.

NTT is an anomaly in the telecom world. It a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on extracting synergies from this consolidation in areas such as merging management and delisting NTT DoCoMo, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies, particularly as the innovative 5G services are likely to be B2B. NTT DoCoMo has made several decisions to significantly lower pricing, one in 2014 and another in 2019 that both hit its operating earnings with flow-on effects to NTT. Further mobile price competition in 2021 has also hit the earnings of all three of the owners of the major mobile networks in Japan. However, with NTT also announcing the planned consolidation of its international businesses with NTT Data we see further potential synergy benefits which should help offset the effects from a difficult mobile market.

Narrow-moat-rated Nippon Telegraph and Telephone Corp's, or NTT’s, third-quarter fiscal 2022 result (quarter-ended December 2022) was in line with our expectations on profitability and better than expected on revenue. Revenue grew 8.3% year on year with an operating profit decline of 1.2% year on year. We believe NTT will beat its unchanged full-year revenue guidance of 3.6% growth, but will struggle to reach its full-year operating profit growth guidance of 2.9%. The strongest businesses were the global solutions businesses segment with operating profit up 20.6% year on year and NTT DoCoMo’s enterprise and smart life segments which both reported double-digit operating profit growth. The weakest businesses were the regional communications businesses (NTT East and NTT West) which saw operating profit decline by 15% year on year this quarter and NTT DoCoMo’s consumer business which saw operating profit decline by 9.5%. The regional business decline was largely due to the JPY 50 billion in benefit to the previous period from the Olympics not in this period. Surging electricity prices have also affected the traditional telecom network businesses by around JPY 15 billion in each quarter this year.

Narrow-moat-rated Nippon Telegraph and Telephone Corp's, or NTT’s, second-quarter fiscal 2022 result (quarter ended September 2022) was slightly lower than our expectations on profitability with revenue growth of 7.4% year on year, operating profit decline of 5.7% year on year and net profit decline of 2.3% year on year. Management retained its fiscal 2022 guidance of 3.6% revenue growth, 2.9% operating income growth, and 0.8% net profit growth, with second-quarter profit growth behind this level, offset by first-quarter growth rates ahead. The global solutions businesses—NTT Data and NTT Ltd—were the main positives in a revenue sense, contributing an increase of JPY 246.5 billion. However, this only resulted in an extra JPY 7.7 billion of operating profit, as sales were affected by semiconductor shortages. Increased fuel prices also drove revenue in the retail electricity business but this had little impact on profits. The regional communications business was the main contributor to the operating income decline, with around JPY 50 billion in benefit to the previous period from the Olympics not in this period.

Narrow-moat-rated Nippon Telegraph and Telephone's, or NTT’s, first-quarter fiscal 2022 result (quarter ended June 2022) was in line with our expectations at an underlying level with revenue growth of 6.1% year on year, operating profit growth of 3.5% year on year, and net profit growth of 8.4% year on year. Management retained its fiscal 2022 guidance of 3.6% revenue growth, 2.9% operating income growth, and 0.8% net profit growth, with first-quarter growth rates clearly ahead of those, helped largely by a positive impact from JPY weakness worth JPY57 billion for the quarter (or 2% of revenue growth and around 12% of operating profit). From an operation perspective, the global solutions businesses—NTT DATA and NTT Ltd—were the main positives. Increased fuel prices also drove revenue in the retail electricity business, but this had little impact on profits. An increase in tax-deferred assets of around JPY 10 billion as a result of a tax credit associated with the past investment by NTT Ltd in Verio also helped the first-quarter result. Growth in the mobile business was hindered by price cuts.

NTT is an anomaly in the telecom world. It a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on extracting synergies from this consolidation in areas such as merging management and delisting NTT DoCoMo, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies, particularly as the innovative 5G services are likely to be B2B. NTT DoCoMo has made several decisions to significantly lower pricing, one in 2014 and another in 2019 that both hit its operating earnings with flow-on effects to NTT. Further mobile price competition in 2021 has also hit the earnings of all three of the owners of the major mobile networks in Japan. However, with NTT also announcing the planned consolidation of its international businesses with NTT Data we see further potential synergy benefits which should help offset the effects from a difficult mobile market.

Narrow-moat Nippon Telegraph and Telephone's, or NTT’s, fiscal 2021 result (fiscal year ended March 2022) was slightly better than our expectations with revenue growth of 1.8% year on year, operating profit growth of 5.8% year on year, and net profit growth of 28.9% year on year. The net profit growth was helped by the elimination of the NTT DoCoMo minorities following the takeover. Management gave fiscal 2022 guidance of 3.6% revenue growth, 2.9% operating income growth, and 0.8% net profit growth. Management is forecasting a fiscal 2022 dividend of JPY 120 per share, up from the JPY 115 per share declared for 2021, and corresponding to a 35% dividend payout ratio. After second-quarter fiscal 2021, the company lifted its dividend guidance from JPY 110 to JPY 115 per share and if the business continues to perform well in the first half of fiscal 2022 we believe a similar increase could be possible in fiscal 2022 which could see the fiscal 2022 dividend lifted to JPY 125 per share. Management is sticking with its fiscal 2023 guidance of EPS of JPY 370 per share, up from the JPY 329 reported in fiscal 2021 and the JPY 340 guided for fiscal 2022. Given this payout ratio is relatively low by telecom standards, NTT supplements its dividend with a buyback which will amount to up to JPY 400 billion to be conducted from May 13, 2022 to end March 2023.

NTT is an anomaly in the telecom world. It a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on extracting synergies from this consolidation in areas such as merging management and delisting NTT DoCoMo, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies, particularly as the innovative 5G services are likely to be B2B. NTT DoCoMo has made several decisions to significantly lower pricing, one in 2014 and another in 2019 that both hit its operating earnings with flow-on effects to NTT. Further mobile price competition in 2021 has also hit the earnings of all three of the owners of the major mobile networks in Japan. However, with NTT also announcing the planned consolidation of its international businesses with NTT Data we see further potential synergy benefits which should help offset the effects from a difficult mobile market.

Narrow moat rated Nippon Telegraph and Telephone Corp's, or NTT’s, third-quarter fiscal 2021 result (quarter ended December 2021) was slightly better than our expectations with revenue growth of 0.3% year on year, operating profit growth of 7.4% year on year and net profit growth of 22.4% year on year. The operating profit growth was a result of increases from mobile of JPY 15.1 billion, data communications of JPY 14.9 billion and regional communications of JPY 10.9 billion. The net profit growth was helped by the elimination of the NTT DoCoMo minorities following the takeover. Management increased its fiscal 2021 guidance to 2.0% revenue growth and 4.4% operating income growth, and 20.1% net profit growth from the previous 0.5%, 3.5% and 18.4% respectively, due to upgraded NTT Data forecasts, partially offset by downgrades from NTT Ltd. NTT also upgraded its fiscal 2021 dividend forecast to JPY 115 per share from JPY 110 per year previously. We retain our JPY 3,950 fair value estimate and our narrow moat rating for NTT based on efficient scale with the firm now earning ROIC above WACC. The stock looks mildly undervalued at current levels, in our view.

NTT is an anomaly in the telecom world. It a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on extracting synergies from this consolidation in areas such as merging management and delisting NTT DoCoMo, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies, particularly as the innovative 5G services are likely to be B2B. NTT DoCoMo has made several decisions to significantly lower pricing, one in 2014 and another in 2019 that both hit its operating earnings with flow-on effects to NTT. Further mobile price competition in 2021 has also hit the earnings of all three of the owners of the major mobile networks in Japan.

NTT is an anomaly in the telecom world. It a world-class wireless business in NTT DoCoMo, but its fixed-line business struggled to generate a decent return on investment for many years. NTT consolidated NTT DoCoMo in 2021 and its near-term strategies will focus on extracting synergies from this consolidation in areas such as merging management and delisting NTT DoCoMo, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies, particularly as the innovative 5G services are likely to be B2B. NTT DoCoMo has made several decisions to significantly lower pricing, one in 2014 and another in 2019 that both hit its operating earnings with flow-on effects to NTT. Further mobile price competition in 2021 has also hit the earnings of all three of the owners of the major mobile networks in Japan.

Narrow-moat-rated Nippon Telegraph & Telephone's, or NTT’s, second-quarter fiscal 2021 result (quarter ended September 2022) was slightly better than our expectations with revenue growth of 1.7%, operating profit growth of 2.8%, and net profit growth of 24.9%.

Narrow-moat Nippon Telegraph and Telephone Corporation's, or NTT’s, first-quarter fiscal 2021 result (quarter ended March 2022) was broadly in line with our expectations with revenue growth of 4.6%, operating profit decline of 2.3% and net profit growth of 24.7%. The reduced operating profit was broadly spread with mobile declining JPY 36.1 billion, and long distance and international declining JPY 11.5 billion. Management retained its fiscal 2021 guidance for 0.5% revenue growth and 3.5% operating income growth, but increased its forecast EPS to JPY 302 per share from JPY 300 previously due to the announced buyback of up to JPY 250 billion, or 2.8% of outstanding shares, in the period from Aug. 10, 2021 to March 31, 2022. We had already factored buybacks of this magnitude into our forecasts for the next five years given NTT’s consistent history of buybacks. The forecast JPY 110 dividend was retained despite the slight EPS forecast increase. Management retained its fiscal 2021 forecast for capital expenditure to increase to JPY 1.75 trillion from JPY 1.73 trillion last year with the increase largely coming from the 35% increase in mobile capital expenditure as a result of 5G. We retain our fair value estimate for NTT at JPY 3,000 and narrow moat rating. The stock still looks fairly valued in our view.

NTT is an anomaly in the telecom world. It owns 66% of a world-class wireless business in NTT DoCoMo, but its fixed-line business has struggled to generate a decent return on investment. NTT DoCoMo makes up about 70% of its current consolidated value and NTT has made a takeover offer for the remaining 34% of NTT DoCoMo. Its near-term strategies will focus on extracting synergies from this consolidation in areas such as merging management and delisting NTT DoCoMo, network synergies from the mobile business using some of NTT’s fixed-line core network and backhaul transmission, alignment of research and development activities and cross selling synergies, particularly as the innovative 5G services are likely to be B2B. NTT DoCoMo has made several decisions to significantly lower pricing, one in 2014 and another in 2019 that both hit its operating earnings with flow-on effects to NTT. There have been some suggestions in media reports that the government being able to more easily control, and lower, mobile pricing was one of the underlying reasons for the offer for the NTT DoCoMo minorities. If this plays out then returns for NTT will be hit.

Narrow-moat-rated Nippon Telegraph and Telephone Corp's, or NTT’s, fiscal 2020 result (year ended March 2021) was broadly in line with our expectations with revenue growth of 0.4% and operating profit growth of 7.0%. The improved operating profit was broadly spread with mobile adding JPY 59 billion, long distance and international adding JPY 43 billion, and regional communications adding JPY 32 billion. Management provided fiscal 2021 guidance for 0.5% revenue growth, 3.5% operating income growth, and 21% EPS growth, as well as a JPY 110 dividend, all of which were better than our expectations. On the back of the result and guidance, we raise our EPS forecasts by 10%-18% over the next three years and our fair value for NTT to JPY 3,000 from JPY 2,500 previously. The stock still looks fairly valued in our view.