Soaring Costs To Curb Kao’s 2022 Profit Growth but Price Hikes May Lead to Future Margin Expansion

We are reducing wide-moat Kao’s profit estimates by 2%-8% from 2022 and onward to reflect cost headwinds stemming from a steep escalation of palm kernel oil prices as well as delay in demand recovery caused by the omicron variant surge. Despite a profit cut and expectation of slow profit recovery in 2022, we expect Kao’s moat, underpinned by its research and development capability, coupled with restructuring efforts, will enable it to regain growth momentum from 2023. Our new fair value estimate of JPY 8,500, lowered from JPY 8,700, presents a handsome 45% upside from the current share price. We suggest investors take near-term profit weakness as opportunities to build a long-term position. The precision healthcare to which we have factored in modest profit contribution is a free embedded option if the business takes off.