Kao’s Profit Weakness No Surprise but Price Hikes Insufficient To Cushion Further Cost Pressures

It is no surprise that wide-moat Kao’s first-quarter result was ugly, with sales up 8.2% (like for like up 4.8%) and operating profits plunging 25% year on year, despite a low comparison hurdle. Contrary to our expectation that management would revise down full-year guidance, the result appears ahead of its internal target. Timing of the JPY 50 billion share buyback announcement also came earlier than we had expected. Benefits of price hikes are likely to kick in from the second quarter although the measures seem insufficient to cushion further cost pressures. We have maintained our forecasts and fair value estimate of JPY 8,100, implying a handsome 35% upside. Whether Kao will be able to meet its profit guidance hinges on the success of price hikes and recovery of cosmetics demand in addition to commodity price trends. We find the cost increase is too large to be absorbed through price hikes and cost-reduction measures over the short term. Our operating profit for 2022 is 6% below guidance.