Meiji Earnings: Pharma Growth and Price Hike Benefits Lift Profits but Higher Prices May Dent Volume

Narrow-moat Meiji 2269 was off to a strong start with first-quarter sales up 6.3% and profits up nearly 8%, thanks to growing price hike benefits of the moaty food business and margin expansion of the pharma business. While profits are ahead of our expectation and management’s targets, we share management’s view that volume might turn soft again after another round of price hikes implemented in August and November on dairy and confectionary items, respectively. We have maintained our forecasts of which our operating profit estimate for fiscal 2023 ending March 2024 is 3% below the guidance. We think Meiji’s profits may have bottomed and view shares, trading at a 16% discount to our fair value estimate of JPY 4,350, as undervalued. Apart from the price hike impacts, whether growth will take off in China in 2024 after completion of factory investment is a critical element to further lift its share price.

First-quarter sales rose 6.3% year on year with operating profits up 7.9%. In addition to continued strength of the pharma growth, rising price-hike benefits coupled with volume recovery of the lucrative probiotic yogurt are attributable to the positive results. Specifically, the food price hikes, lifting average selling prices by about 10%, outweighed the cost inflation and impacts of volume decline, the first time since late 2021 when input costs started escalating.