LY Corp Earnings: Better Margins and Top-Line Growth With Line Yahoo Synergies; Shares Undervalued

We raise our fair value estimate for narrow-moat LY Corp to JPY 520 from JPY 480 previously, based on a more positive operating margin and top-line outlook. Since the merger with Line in 2021, postmerger integration remained painfully slow until in recent quarters. Besides revamping its management structure, LY Corp also sliced its redundant businesses. These efforts paid off, as the December quarter recorded a JPY 16.5-billion, or 17.4%, year-on-year improvement in adjusted EBITDA. We believe that LY Corp is now finally at the cusp of moving on to the next business stage—accelerating top-line growth through realizing synergies with Yahoo, Line, and PayPay. With a leaner organizational structure that fundamentally lowers operational costs, we raise our operating margin forecast to 11.3% from 10.2% for the fiscal year ending March 2024, as well as our 2027 operating margin assumption to 14.4%, from 12.6% previously. We also uplift our revenue growth rate for the next five years to 6.7% from 6.2%, as we expect the company to invest more in promoting the cross-use of services. We believe shares are currently undervalued.