Meiji Earnings: Pharma Growth Lifts Profits; Persistent Volume Contraction of Probiotics a Concern

Narrow-moat Meiji’s first-quarter profits were lifted by solid pharmaceutical growth. On the other hand, increased marketing investment and widened losses in China depressed profits of the moaty food business. Volume contraction of the lucrative probiotic business remains a key concern while demand for vaccines, including the ones for influenza and a new one for covid-19, will be the key swing factor to the profit outlook for the rest of the year. Given limited visibility to the vaccine demand, we have maintained our forecasts and fair value estimate of JPY 4,400. We continue to view shares trading at a 17% discount to our intrinsic value as undervalued. Yet, despite Meiji’s ability to generate cash flow, we think the absence of top-line growth remains a key negative weighing on its share price. Our operating profit projection for fiscal 2024 ended March is a touch below management’s guidance.