Solid Pharma Growth Offsets Food Cost Inflation and Probiotic Weakness, but Gap Likely to Widen

Narrow-moat Meiji posted mixed first-quarter results as a dip in moaty food profits was offset by strong pharma growth in part lifted by a one-off factor. Due to unexpected price hikes on domestic raw milk from November and Japanese yen weakness, it has doubled the cost increase guidance to JPY 27 billion, up from the initial JPY 13 billion projection. Despite management’s intention to pass on higher costs, we think price hikes may alienate consumers, causing volume decline over the short term, given persistent food and energy inflation. We have maintained our forecasts where our operating profit estimate for 2022 is 6% below the guidance. Given that cost pressure and mounting investment in China will cap Meiji's profit growth through fiscal 2023, we suggest that investors keep this undervalued moaty name, trading at a 26% discount to our intrinsic value, on their radar.