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KDDI on Track to Beat Its Fiscal 2020 Guidance; Fair Value Estimate Increases to JPY 4,000

Dan Baker Senior Equity Analyst

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.

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Company Profile

Business Description

KDDI is Japan's second-largest wireless operator (31% market share), the largest pay-TV operator (53% market share) and the second-largest provider of fibre-to-the-home broadband (12% market share). It has grown through acquisition and is focusing on increasing the number of customers who subscribe to more than one telecommunication service. It is also looking to grow its Life Design business which includes commerce, energy, and finance and had over 11.5 million IOT connections by the end of March 2020.

Garden Air Tower, 10-10, Iidabashi 3-chome
Tokyo, 102-8460, Japan
T +81 333470077
Sector Communication Services
Industry Telecom Services
Most Recent Earnings Dec 31, 2020
Fiscal Year End Mar 31, 2020
Stock Type
Employees 83,308