Kirin Earnings: Overseas Soft Drinks and Pharma Business Drove Profit Growth; Retain Fair Value

Narrow-moat Kirin reported fiscal 2024 third-quarter results with revenue above our estimates while operating profit trailed our expectations. Profit growth was mainly driven by price hikes in the US soft drinks business and strong demand for its key commercialized drugs. The domestic beer segment, however, recorded margin contraction due to higher marketing expenses. We raised our 2024 revenue projection but reduced operating profit estimates due to higher sales and marketing expenses as well as associated costs with Fancl’s consolidation. We also raised 2025-28 revenue and operating profit forecasts by 5% to 6% to account for the addition of Fancl. However, the increment to net income is reduced to 4% after accounting for minority interests. As a result, we retain our fair value estimate at JPY 2,600 per share, which implies 15 times 2025 price/earnings, 8 times enterprise value/EBITDA, and 2.8% dividend yield. We continue to view shares as undervalued. We think the headwinds related to losses in Kyowa Hakko are mostly priced in and that the market has overlooked the margin expansion potential from the recovery of Kirin’s domestic beer business.