Flu Vaccines and Probiotics Lifting Meiji’s Profits but Results Lagging the Guidance

Recovery in pharmaceutical profits combined with healthy demand for lucrative probiotic yogurt lifted narrow-moat Meiji’s second-quarter profits despite a nearly 5% drop in revenue. The pharmaceutical business swung back to profit thanks to strong demand for influenza vaccines. Nevertheless, sales and profits seem to be lagging management’s guidance, which targets 7% growth in operating profit. We have fine-tuned our forecasts, but the net impact on our fair value estimate is neutral and leaves it at JPY 9,800, implying 30% upside. Our profit estimate is 4% below the fiscal 2020 guidance. Meiji has been trading at a significant discount to its food peers in part due to a lack of top-line growth drivers. Regaining growth momentum in lucrative probiotic yogurt by launching R1 or LG 21 in China, or launching new products offering scientifically proven health benefits in Japan, will be critical to triggering re-rating of Meiji’s shares, in our view.