Kirin Earnings: Drop in Brewery Volume Curbs Profit Growth, Restructuring Benefit Not Yet in Sight

Narrow-moat Kirin looks on track to beat its full-year profit guidance despite mixed third-quarter results, with sales up 6.9% year on year and core business profit up 5.2%. Despite improved profits across most of the core businesses, the moaty domestic brewery business saw sales and profit decline due to a tough comp. Widened losses in Kyowa Hakko Bio might deepen market’s concern over the growth prospect of the health science business and management’s execution capabilities. As we have pointed out, turning Kyowa Hakko Bio into profitability will help restore the market’s confidence in Kirin’s strategic move into the health science industry. We have maintained our forecasts and fair value estimate of JPY 2,600 and view Kirin’s shares as undervalued with 20% upside to our intrinsic value. While we see limited downside at the current share price level, we think the persistent uncertainty surrounding the health science growth is likely to weigh on Kirin’s near-term share price.