Unicharm Set to Beat Profit Guidance; Rampant Cost Inflation May Lead to Profit Decline in 2022

Narrow-moat Unicharm’s third-quarter results were ahead or our expectations thanks to a greater-than-expected currency tailwind as well as limited impact of the delta variant surge in Southeast Asia. Despite a sizable cost increase from the second half, we anticipate that Unicharm will beat its full-year profit guidance although the profit upside will depend on the size of marketing investment in the fourth quarter. We have raised the growth assumption of Asia business by 3% to reflect more favorable currency movement for 2021 but also adjusted the minority interest and tax rate accordingly. Meanwhile, management hints at a JPY 10 billion-JPY 15 billion cost increase for 2022, in line with our expectation. The assumption adjustments, combined with increased time value of money, lead to a modest increase in our fair value estimate of JPY 3,750 from JPY 3,650. While Unicharm’s moats, underpinned by product development and marketing capabilities, will enable share gains in the faster growing emerging markets, the potential seems to have been mostly priced in. We view shares as overvalued, trading at an 18% premium to our fair value estimate.