Kao's Downward Revision Widely Expected; Making Progress on Regaining Market Share

Wide-moat Kao’s reduction in 2022 profit guidance (but with dividends maintained) was widely expected by the market and Morningstar, although we had expected the sharp correction in palm kernel oil prices would alleviate the impact of cost inflation. The dreadful second-quarter results, with sales up 9.2% (up 3.7% on a currency-neutral basis) and core operating profits down 26%, were no surprise, given skyrocketing commodity prices and China’s lockdowns. We focus on the progress made by the underlying businesses on the back of strategic pivots and price hikes rather than the near-term cost pressure and profit outlook. We are encouraged by improved market share in several key product categories despite marginal contribution to profits. While our intrinsic value implies 41% upside, execution will remain the main concern of investors who may not feel comfortable owning the name until management starts delivering results.