Kirin Earnings: Brewery and Beverage Volume Decline Weighs on Profits; Execution Challenges Persist

Narrow-moat Kirin’s share price underperformance has prompted management to address the market’s concerns over its business transformation program—moving into the health science field—that it lacks a track record and has been struggling with the restructuring of loss-making Kyowa Hakko. While increased business complexity might have led to a diversification discount on its valuation multiples, we believe that the unsatisfactory performance of the businesses is to blame. We anticipate its restructuring efforts, particularly for Lion and Kyowa Hakko, will lead to improved profitability into 2024. Given the market’s doubts about Kirin’s strategic pivot and management’s execution capability, making Kyowa Hakko profitable again, in 2024, is critical to restoring the market’s confidence. We maintain our forecasts and fair value estimate of JPY 2,600. We view shares, trading at a 23% discount to our intrinsic value, as attractive. We acknowledge that investors’ interest in the stock may not return until it shows signs of improvement in health science growth and execution, but see limited downside risk at the current price level. Our forecasts have factored in moderate growth in the health science business.