KDDI Earnings: Strong Q2 With Core Mobile Revenue Rising

Narrow-moat KDDI’s 9433 second-quarter fiscal 2023 result (quarter ended September 2023) was ahead of our expectations, making up for a weaker first quarter and leaving the business on track to beat its unchanged full year guidance of operating revenue rising 2.3%, and both operating income and net profit rising 0.4%, in our opinion. Second quarter operating revenue increased by 4.1% with operating profit up 12.3%. Most importantly, Muti-Brand communications ARPU revenues grew JPY3.7 billion year-on-year in the second quarter, having fallen by JPY 30.6 billion in the corresponding quarter a year ago and by JPY 2.9 billion in the first quarter. Mobile prices seem to have stabilized and KDDI should also gain from the extension of the roaming arrangement between KDDI and Rakuten announced in May, which should benefit KDDI by between JPY 10 billion and JPY 20 billion compared with previous estimates. We make slight upgrades to our forecasts and our fair value for KDDI increases to JPY4,500 from JPY4,400 previously. Our forecasts now assume KDDI increases fiscal 2023 operating profit by 3.1% and net profit by 7.3%. At this fair value, KDDI would trade on a fiscal 2023 price/earnings ratio of 13.6 times, with a 3.1% dividend yield. We see both KDDI and NTT as broadly fairly valued at current levels and would prefer them over SoftBank Corp.

Our medium-term forecasts imply 2.3% operating income CAGR over the next five years. We believe competitive pressures on KDDI’s key telecom business will remain reasonably high, particularly from SoftBank which is targeting adding over million customers in fiscal 2023, and to a lesser extent Rakuten which is still reporting large losses from its mobile business but had invested around JPY 2.6 trillion in cumulative EBITDA losses and capex in its telecom business as at June 2023.