Rebound in Oversea Sales Lifting Unicharm’s Profits; Cost Inflation to Depress Second-Half Margins

Narrow-moat Unicharm’s second-quarter profits were slightly ahead of our expectation because of greater-than-expected currency tailwinds. Continued expansion in the gross margin was a surprise although the upward trend is set to reverse in the second half given JPY 6 billion additional costs stemming from the surge in crude oil prices. We have fine-tuned our assumptions to reflect more favorable currency movement and pet care strength for 2021, but higher input costs for 2022. The adjustments have an immaterial impact on our fair value estimate of JPY 3,650, indicating a 19% downside from the current share price. While Unicharm’s moat will allow it to gain shares in the faster-growing emerging markets, the upside seems to have been priced in. We prefer rival Kao, which offers more attractive valuations and growth upside fueled by expansion its product lineups in Asia.