Meiji Earnings: Profits Drop as Cost Inflation Peaks; Volume Decline Abates

Narrow-moat Meiji missed its guidance as we had expected and its profits are largely in line with our forecasts. We have delayed our profit rebound scenario by a year to 2024, assuming raw material cost inflation peaks in the first half of fiscal 2023. The second round of price hikes for drinking milk and yogurt to be implemented during August in Japan, stemming from increased raw milk costs, is likely to impair near-term volumes. Accelerated growth momentum in China should be a top-line driving force from 2024 after completion of four new factories in the country. Meanwhile, the recovery of probiotic yogurt and plain yogurt volumes is crucial to restoring margins and profitability. We have maintained our fair value estimate of JPY 4,350. Despite good 32% upside to our intrinsic value, investors’ appetite for Meiji may not rebound until it delivers meaningful top-line growth, which requires new hit products to bolster domestic probiotic sales or rapid distribution expansion in China.