Yakult Earnings: Double-Digit Profit Decline Persists Due to Sluggish Volume in Asia and Yakult 1000

Narrow-moat Yakult looks unlikely to meet its revised fiscal 2023 (ending March 2024) profit targets, which are 4%-7% above our estimates. Volume contraction of Yakult 1000—a risk we had flagged—coupled with persistent weakness in China and Indonesia led to a more than 10% year-on-year decline in third-quarter operating profit. While management has maintained its guidance, pinning hopes on a Yakult 1000/Y1000 sales rebound from February, we think the gap is too large to close. Yet, the market appears to have factored in a much worse scenario. Given the recent correction, we view the shares, trading at a 16% discount to our JPY 3,800 fair value estimate, as undervalued. Management’s pivot to profitability over volume growth in China may cease Asia’s profit downward trend in 2024.