Shiseido’s Divestiture Benefits More Than Priced In; Heavy Dependence on China a Key Risk

We are raising narrow-moat Shiseido’s fair value estimate to JPY 6,900 from JPY 6,800 after taking a detailed look into the divestiture benefits of U.S. makeup brands BareMinerals, Buxom, and Laura Mercier (about 5+% of group sales as of the first half of 2021, sold to the private equity fund Advent). The divestiture benefits, likely to add more than JPY 10 billion to the firm’s operating profits, had been mostly factored into our assumption of a JPY 18 billion increase in North America profits in 2022. We had highlighted Bare Escentuals as a top divestiture candidate as management’s turnaround attempts made little progress, while COVID-19 has exacerbated the challenges. Given the recent rally, we view shares as overvalued with a 16% downside to our fair value estimate. Despite Shiseido’s moat in prestige skincare, we are wary of its heavy dependence on the China market, which exhibits greater political risk and sales volatility, and we prefer to wait for attractive entry points.