Kao Earnings: Structural Reforms Bearing Fruit With Strong Domestic Results; Retaining Fair Value

Wide-moat Kao reported fiscal 2024 fourth-quarter results with revenue and operating profit exceeding our expectations. The chemical business drove top-line beat, while price hikes and premiumization in the fabric and home care segments in Japan also drove revenue above our forecasts. Meanwhile, profit margins for the cosmetics and chemicals segments were better than our forecasts, which drove full-year operating profit to exceed our estimate by roughly 4%. We think the structural reforms implemented in fiscal 2023 have improved operational efficiencies in the domestic consumer business and reduced exposure to underperforming overseas businesses. We increased our fiscal 2025 operating profit forecast by 3% to account for continued strength in the fabric care and chemicals segments. However, we left our medium-term earnings forecasts largely unchanged as we already baked in more pronounced margin expansion from fiscal 2026 onwards. As a result, we retain our fair value estimate at JPY 6,800 per share, which implies 28 times fiscal 2025 P/E and 12 times enterprise value/EBITDA. We view Kao’s shares as fairly valued.