Unicharm Expecting Volume Growth and Premiumization To Offset Soaring Costs but Downtrading a Risk

Narrow-moat Unicharm beat its full-year profit guidance as expected, but to our surprise guides 3% growth in core business profits (gross profits minus SG&A) despite skyrocketing cost inflation. We found the assumption that an improved product mix will boost sizable profits shaky, given growth deceleration spotted in some high-margin categories during the fourth quarter. We have fine tuned our estimates, projecting more than 10% decline in business profits for 2022. We consider downtrading a risk to emerging markets when retail prices rise. We have maintained our fair value estimate of JPY 3,750 and continue to view shares as overvalued, trading at a 14% premium to our intrinsic value.