Reducing Kao Profit Estimates To Reflect Further Cost Surge; Long-Term Growth Prospects Intact

We have reduced wide-moat Kao’s fair value estimate to JPY 8,100 from JPY 8,500 to reflect the commodity cost surge through 2022 as commodity prices, further elevated by Russia’s war in Ukraine, show no signs of trend reversal. We anticipate that Kao will reduce its profit guidance at the first-quarter result announcement scheduled for mid-May. It is no doubt that current inflation headwinds will hit Kao’s bottom line hard, likely through the rest of year, unless the ongoing geopolitical tensions are greatly eased. Yet, price hikes triggered by the current hardship could turn into margin expansion opportunities when the commodity price trends reverse. Despite near-term cost pressure, we continue to view Kao’s valuations attractive, trading at a handsome 55% upside to our new intrinsic value.