Kao Earnings: Profits Soared on Expanded Price Hike Benefits and Eased Cost Pressure

Wide-moat Kao’s robust profit rebound boosts our confidence in its ability to restore margins and profitability. Third-quarter sales fell 1.6% (currency-neutral 3.9% decline) while core business profits soared 53%, thanks to expanded price-hike benefits and eased cost pressure. We are particularly encouraged by sizable margin improvement of the fabric and homecare business, Kao’s cash cow, as well as progress in price hikes. It appears that business profits are JPY 5 billion or 8% above its nine-month internal target. We have maintained our forecasts and fair value estimate of JPY 7,500. Kao remains our top pick of the Japan consumer sector, and we continue to view Kao’s shares as undervalued, indicating 41% upside from the close of Nov. 8.