NTT Earnings: Strong Growth Leads to Fair Value Estimate Increase to JPY 4,400

Narrow-moat Nippon Telegraph and Telephone’s 9432, or NTT’s, fiscal-2022 result (year ended March 2023) was in line with our expectations on profitability and better than expected on revenue. Full-year revenue grew 8.1% with operating profit increasing 3.4%, while fourth-quarter revenue and operating profit grew 10.2% and 35% year on year, respectively. The strongest segment was global solutions with operating profit up 26% for the full year and 83% year on year in the fourth quarter. The weakest business was the regional communications businesses (NTT East and NTT West) where operating profit declined by 4.4% for the full year mainly due to the JPY 50 billion in benefit to the previous period from the Olympics not in this period. NTT DoCoMo’s consumer business also experienced operating profit decline by 2.7% for the full year as a result of price declines, but fourth-quarter operating profit was up 25% and the company is guiding to 1.8% growth in operating profit from this segment in fiscal 2023. Surging electricity prices have also affected the traditional telecom network businesses by around JPY 15 billion in each quarter this year.

Management provided its first specific guidance for fiscal 2023, targeting a 0.6% decline in operating revenue, but a 6.6% increase in operating profit, a 3.5% increase in net profit and a 6.3% increase in EPS. Management also announced a 25-for-1 stock split with a record date of June 30, 2023, and effective date of July 1, 2023. We will not include this in our forecasts until the effective date.

We make small increases to our revenue and operating profit forecasts and our NTT fair value estimate increases to JPY 4,400 from JPY 4,200 previously. Our narrow moat rating for NTT, based on efficient scale, is also retained with the firm now earning return on invested capital above weighted average cost of capital. The stock looks mildly undervalued at current levels in our view and is our preferred stock in the Japanese telecom market.