Unicharm and Kao: Transferring Coverage and Upgrading Unicharm’s Moat and Fair Value Estimate

We transfer coverage of Kao and Unicharm, with Kao retaining its wide moat rating but Unicharm’s moat upgrading from narrow to wide. We increased our fair value estimate for Unicharm from JPY 4,600 per share to JPY 5,700 per share and reduced our fair value estimate for Kao from JPY 7,600 per share to JPY 6,800 per share. Our fair value estimates for both companies imply fiscal 2024 earnings multiples that are largely consistent with their 10-year averages. We prefer Unicharm over Kao given the former’s laser focus on personal hygiene categories with ample opportunities in overseas markets. For Kao, we think the speed of turnaround for its cosmetics business remains uncertain and could remain a medium-term drag to operating margin.