Pan Pacific International: Reinitiate Coverage With No Moat; Private Labels Key to Midterm Growth

We reinitiate coverage of Pan Pacific International Holdings with a no moat rating and fair value estimate of JPY 1,940. We think the company has a considerable presence in discount store and general merchandise store formats in Japan, together with a popular retail banner in the North American and Asian markets. But we no longer see traces of a cost advantage that underpinned our previous narrow moat rating due to the declining revenue mix of closeout products while private-label sales are still small. We think PPIH has to compete with other retailers, including drug stores and supermarkets, in the fresh grocery, branded, and private-label categories. Our fair value estimate implies 16 times fiscal 2024 (ending June 2024) price/earnings, which is roughly in line with the average for Japanese retailers. We think PPIH’s shares are overvalued and do not see a strong reason for a notable valuation premium versus its peers.