Reversed Probiotic Demand Drags on Meiji's Profits; New Product Launches Key to Watch

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.