Kao Earnings: Profits Triple, Lifted by Price Hikes, Lower Costs, and Restructuring Benefits

Wide-moat Kao’s robust profit rebound, with first-quarter core operating profits having nearly tripled, gives us confidence that Kao is on track to rebuild its margins and poised to beat its profit guidance. Despite the restructuring impacts and China headwinds, solid domestic recovery fueled margin expansion and profit growth. The results echo our thesis that Kao’s margins would leap after price hike benefits fully kick in while cost inflation eases. The volume growth achieved amid price increases in Japan also substantiates its moat underpinned by brand equity and research and development capabilities. We have fine-tuned our foreign exchange assumptions and marginally lift our fair value estimate to JPY 7,600 from JPY 7,500 to reflect increased time value of money. Our projection that core operating profits will exceed the pre-covid peak level in 2026, a year before management’s new target, remains intact. We continue to view shares, trading at 12% discount to the intrinsic value, as undervalued. Our operating profit for 2024 is 7% above guidance.