KDDI Earnings: Increased Buybacks and Rakuten Roaming Deal; Lifting Fair Value Estimate to JPY 4,400

Narrow-moat KDDI’s 9433 fiscal 2022 result (year ending March 2023) was better than our expectations, with operating profit up 1.4% and net profit up 0.7%, despite a difficult year due to costs associated with the two-day network outage in July, the impact of fuel price hikes, losses from the energy business related to fuel price volatility, and the price reductions in the key mobile business. While the reported full-year operating profit missed the company’s guidance of increasing by 3.7%, after the first nine months we had thought full-year operating profit could see a slight decline. Fourth-quarter operating income increased by 25% year on year. The company is guiding to fiscal 2023 operating revenue rising 2.3%, and both operating income and net profit rising 0.4%. However, Rakuten and KDDI announced an extension of their roaming arrangement on the same day the result was released, which is likely to mean more roaming revenue flowing to KDDI in fiscal 2023. Management couldn’t give exact guidance on this, but did indicate that it was likely to benefit by at least JPY 10 billion. We estimate this would imply guidance of around 2%-3% operating profit and net profit growth. We make 5%-10% increases to our net profit forecasts, partly taking into account increased share buybacks and the new roaming deal, and as a result, our fair value estimate for KDDI increases to JPY 4,400 from JPY 4,100 previously. At this fair value, KDDI would trade on a fiscal 2023 price/earnings ratio of 13.3 times with a 3.1% dividend yield. We see both KDDI and SoftBank as broadly fairly valued at current levels, and would prefer NTT.

The company had a target to grow EPS by 50% from fiscal 2018 to fiscal 2024. Given the macroeconomic conditions, including several bouts of mobile price declines, we do not forecast the company to meet this target as we forecast fiscal 2024 EPS of JPY 356 compared with the JPY 389 target.