Company Reports

Narrow-moat Meiji looks set to beat its profit guidance for fiscal 2023 ending March 2024. The third-quarter operating profit climbed 17% year on year thanks to price hike benefits and easing cost pressures. On the other hand, persistent volume weakness caused by price hikes continues to depress the top line, leading to only 2.3% growth. We have finetuned our assumptions, which leaves an immaterial impact on our fair value estimate of JPY 4,350. While we continue to view Meiji’s shares as undervalued, a lack of large-scale innovations to boost its top-line growth remains a key challenge facing management and weighs on its share performance. Our profit forecast for fiscal 2023 is a touch above the guidance.

We have raised our fiscal 2023 profit estimates following narrow-moat Meiji’s upward revision but reduced our profit forecasts beyond 2025 given China's more subdued growth outlook. The adjustments leave an immaterial impact on our fair value estimate of JPY 4,350. A wider volume decline of the lucrative probiotic yogurt drinks and persistent weakness in yogurt sales indicate that sales momentum is unlikely to rebound anytime soon. We, therefore, expect food profits to fall short of Meiji's renewed guidance but project the pharmaceutical business to beat the profit guidance, given strong influenza vaccine demand. We think Meiji’s profits may have bottomed and view shares, trading at a 23% discount to our fair value estimate of JPY 4,350, as undervalued. Apart from growth in China, whether it is able to restore sales volume and margins of the domestic probiotic yogurt business is critical to erasing the market’s concerns over the lack of growth drivers. Our profit estimates of fiscal 2023 ending March 2024 remain a touch below the guidance.

Narrow-moat Meiji was off to a strong start with first-quarter sales up 6.3% and profits up nearly 8%, thanks to growing price hike benefits of the moaty food business and margin expansion of the pharma business. While profits are ahead of our expectation and management’s targets, we share management's view that volume might turn soft again after another round of price hikes implemented in August and November on dairy and confectionary items, respectively. We have maintained our forecasts of which our operating profit estimate for fiscal 2023 ending March 2024 is 3% below the guidance. We think Meiji’s profits may have bottomed and view shares, trading at a 16% discount to our fair value estimate of JPY 4,350, as undervalued. Apart from the price hike impacts, whether growth will take off in China in 2024 after completion of factory investment is a critical element to further lift its share price.

Narrow-moat Meiji missed its guidance as we had expected and its profits are largely in line with our forecasts. We have delayed our profit rebound scenario by a year to 2024, assuming raw material cost inflation peaks in the first half of fiscal 2023. The second round of price hikes for drinking milk and yogurt to be implemented during August in Japan, stemming from increased raw milk costs, is likely to impair near-term volumes. Accelerated growth momentum in China should be a top-line driving force from 2024 after completion of four new factories in the country. Meanwhile, the recovery of probiotic yogurt and plain yogurt volumes is crucial to restoring margins and profitability. We have maintained our fair value estimate of JPY 4,350. Despite good 32% upside to our intrinsic value, investors’ appetite for Meiji may not rebound until it delivers meaningful top-line growth, which requires new hit products to bolster domestic probiotic sales or rapid distribution expansion in China.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.

Narrow-moat Meiji’s further downward revision of its full-year guidance, slashing operating profits by JPY 6 billion or 7% in just three months, was a surprise. While sales of its moaty probiotics yogurt finally swung back to growth, widened volume decline of yogurt, as a result of consumers’ downtrading and intensified competition, combined with higher-than-expected energy cost inflation and promotional spending, is attributable to the cut in profit guidance. We have delayed our expectation of profit recovery toward 2024 from mid 2023 as another round of prices hikes, to be implemented in April, is likely to further depress demand in some categories. We have accordingly lowered our fair value estimate to JPY 8,700 from JPY 9,100. Our profit estimates are a touch below the fiscal 2022 guidance.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.

It is no surprise that narrow-moat Meiji revised down its full-year profit guidance although the nearly 10% cut in operating profit is greater than our expectation of 6%. Cost inflation coupled with persistent weakness in probiotic yogurt and the negative impact of price hikes on sales volumes are attributable to a more than 20% decline in second-quarter operating profits. Management seems to have taken a more cautious stance, anticipating limited price hike benefits during the second half although the sales decline of the once lucrative R1 probiotic yogurt, a key drag on recent profits, has narrowed, turning positive from October after the high-single-digit decline recorded in the second quarter.

Narrow-moat Meiji posted mixed first-quarter results as a dip in moaty food profits was offset by strong pharma growth in part lifted by a one-off factor. Due to unexpected price hikes on domestic raw milk from November and Japanese yen weakness, it has doubled the cost increase guidance to JPY 27 billion, up from the initial JPY 13 billion projection. Despite management’s intention to pass on higher costs, we think price hikes may alienate consumers, causing volume decline over the short term, given persistent food and energy inflation. We have maintained our forecasts where our operating profit estimate for 2022 is 6% below the guidance. Given that cost pressure and mounting investment in China will cap Meiji's profit growth through fiscal 2023, we suggest that investors keep this undervalued moaty name, trading at a 26% discount to our intrinsic value, on their radar.

We have reduced narrow-moat Meiji’s fair value estimate to JPY 9,100 from JPY 9,800 to reflect a delayed probiotic launch in additional to fierce competition in the space at home. Fourth-quarter operating profit beat its revised profit guidance and our estimate, mainly attributable to better-than-expected pharma profits. Despite its price hike efforts to offset cost increase, volume contraction of lucrative probiotic yogurt, caused by intensified competition and lack of large-scale new products, is likely to cap or further dampen its profit growth. Moreover, increased investment in China combined with impact of lockdowns of many first tier and second tier cities will also weigh on profits. While we see a handsome 37% upside to our new intrinsic value, investors might not renew their appetite for the name until Meiji demonstrates top line growth which requires new hit products to bolster domestic probiotic sales or a step-up in China’s distribution expansion.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.

Narrow-moat Meiji’s further downward revision of its full-year guidance, reducing operating profits by 10% in just three months, was a surprise. Sluggish sales of its moaty lucrative probiotics, a lingering concern, combined with cost inflation and delayed fee revenue of the vaccine business, is attributable to the cut in profit guidance. We have adjusted our forecasts, which, partially offset by increased time value of money, leaves an immaterial impact on our fair value estimate of JPY 9,800. Our profit estimates remain a touch above the fiscal 2021 guidance.

Narrow-moat Meiji’s profit downward revision, lowered by more than 5%, was above our expectation while the announcement of the JPY 30 billion share repurchase program was a surprise. It appears that management has taken a much more cautious stance on the second-half outlook because of continued contraction of lucrative probiotics and yogurt sales and accelerating cost inflation. As we have cited, a large-scale new product launch is crucial to reverse the downward trend of probiotic yogurt sales given changes in the operating environment including competition and consumers' preferences. We have adjusted our profit estimates for mainly 2021 and 2022 to delay the impact of the new probiotic launch and factor in added input cost increase.

It is no surprise that narrow-moat Meiji's fiscal first-quarter profits would look ugly, given a tough comparison, but the nearly 20% decline in operating profits fell short of our expectation and the company’s internal target. A deteriorated product mix stemming from a midteens decline in lucrative probiotic yogurt sales was a key drag. We expect the impact of COVID-19 on probiotic yogurt demand will cycle toward the third quarter and profits return to growth, although profit expansion is likely to remain limited. We have maintained our forecasts and JPY 9,800 fair value estimate. The rollout of a new probiotic yogurt product will be a key event to watch during the second half. The product may represent an outcome of management’s efforts to reorganize business operations to ensure product launch success. While mounting capital expenditure and marketing investment in China will cap Meiji's profit growth through fiscal 2023, we suggest investors to keep this undervalued moaty name, trading at a 32% discount to our fair value estimate, on their radar. Our profit and earnings projections are a touch below the guidance.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.

Narrow-moat Meiji’s fourth-quarter operating profit came in above our estimate, but was in line with guidance. It appears one-off pharmaceutical royalty income, estimated at around JPY 3 billion, offset a sharp drop in probiotic sales stemming from the reversed impact of a surge in demand for immunity-boosting foods last year. Management again guides to an optimistic midterm outlook driven by food expansion. Although we are skeptical about its ability to achieve the JPY 120 billion operating profits by fiscal 2023 (our estimate of JPY 113 billion), the current share price suggests profit decline over the next five years. Despite tepid top-line growth, Meiji has demonstrated a proven track record in generating positive free cashflow. We think Meiji’s moaty products including probiotics, nutrition, and high-cacao-content chocolate stand a good chance to gain traction with health-conscious Chinese consumers. While Meiji’s profits are unlikely to take off until 2023, we suggest investors to accumulate shares in this undervalued name offering a handsome 44% upside to our fair value estimate of JPY 9,800.

It is no surprise that narrow-moat Meiji revised down its full-year guidance, reducing sales and operating profits by about 4%. Weakness in its moaty lucrative probiotics and yogurt sales is a key concern, which was partially offset by robust growth in influenza vaccines. We reckon that intensifying competition in the immune-boosting food market with many new products being launched is attributable to a slowdown in R1, a probiotic yogurt line promoting immunity health. We have fine-tuned our forecasts, but the net impact on our fair value estimate is neutral and leaves it at JPY 9,800, implying 35% upside. Our profit estimates remain a touch below the fiscal 2020 guidance.

Recovery in pharmaceutical profits combined with healthy demand for lucrative probiotic yogurt lifted narrow-moat Meiji’s second-quarter profits despite a nearly 5% drop in revenue. The pharmaceutical business swung back to profit thanks to strong demand for influenza vaccines. Nevertheless, sales and profits seem to be lagging management’s guidance, which targets 7% growth in operating profit. We have fine-tuned our forecasts, but the net impact on our fair value estimate is neutral and leaves it at JPY 9,800, implying 30% upside. Our profit estimate is 4% below the fiscal 2020 guidance. Meiji has been trading at a significant discount to its food peers in part due to a lack of top-line growth drivers. Regaining growth momentum in lucrative probiotic yogurt by launching R1 or LG 21 in China, or launching new products offering scientifically proven health benefits in Japan, will be critical to triggering re-rating of Meiji’s shares, in our view.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.