KDDI Earnings: One-off Drag on Operating Profit, but Full-Year Guidance Is Retained

Narrow-moat KDDI’s 9433 first-quarter fiscal 2023 result (quarter-ending June 2023) was slightly behind our expectations due to accounting changes, but the underlying result leaves the business on track to hit its unchanged full-year guidance of operating revenue rising 2.3%, and both operating income and net profit rising 0.4%. First-quarter operating revenue decreased by 1.4% with operating profit down 10.3%. An accounting change negatively affected the operating profit by JPY 18.2 billion with a further JPY 4 billion from the negative increase of power price increases on the electricity business, leaving underlying operating profit down around 2.8%. Part of the expected turnaround for the full-year growth comes from the extension roaming arrangement between KDDI and Rakuten announced in May which should benefit KDDI by between JPY 10 billion and JPY 20 billion compared with previous estimates. The two parties are also in discussion about a further extension of this agreement to the central business districts but an agreement on this has yet to be reached. We make no changes to our forecasts or our fair value estimate for KDDI of JPY 4,400. At this fair value, KDDI would trade on a fiscal 2023 price/earnings ratio of 13.3 times with a 3.1% dividend yield. We see both KDDI and SoftBank as broadly fairly valued at current levels and would prefer NTT.

KDDI company has made provisions for a JPY 300 billion share buyback in fiscal 2023 which would be an increase from the JPY 250 billion spent in fiscal 2022. JPY 250 billion of this will be repurchased through a tender offer designed to mop up some shares to be sold from major shareholder, Toyota. The strong balance sheet with net debt/EBITDA of only 0.4 times at end fiscal 2022 easily allows for this increase in buyback activity in our view.