Analyst Note| Dan Baker |
Narrow-moat KDDI’s third-quarter fiscal 2020 results (quarter ending December 2020) was broadly in line with our estimates. Revenue increased by 3.6% with operating income down 2.8% and net profit down 4.1% from the previous year. The results for the first nine months of revenue growth of 0.5% and operating profit growth of 3.2% are tracking ahead of unchanged management guidance of flat revenue, operating profit and net profit. We increase our forecasts by 7%-8% and our fair value estimate for KDDI to JPY 4,000 from JPY 3,700 and USD 19 per ADR from USD 17 per ADR. At this fair value estimate, KDDI would trade on a price/earnings ratio of 13.2 times with a 3% dividend yield. Our operating profit forecasts over the next five years imply a 1.7% CAGR. We retain our narrow moat rating based on the cost advantage and efficient scale and our negative moat trend based on Rakuten’s entry and the expected continued pricing pressures. KDDI remains our preferred Japanese telecom investment. On each companies’ fiscal 2020 guidance KDDI (price/earnings ratio of 11.3 times) is cheaper than Softbank Corp (price/earnings ratio of 13.5 times). SoftBank tends to trade at a premium given it pays out 85% of its earnings in dividends while KDDI only pays out around 40%. Nevertheless, KDDI has a much stronger balance sheet (net debt/EBITDA of 0.8 times versus Softbank’s 2.8 times) and supplements its dividend payments with buybacks. NTT trades on a similar price/earnings ratio to KDDI but paid too much for the remainder of NTT DoCoMo in our view and is encumbered by the lower-growth fixed-line business.