Meiji Earnings: Despite Expanded Price Hike Benefits, Food Profits Fell As Volume Remains Sluggish

We have raised our fiscal 2023 profit estimates following narrow-moat Meiji’s upward revision but reduced our profit forecasts beyond 2025 given China's more subdued growth outlook. The adjustments leave an immaterial impact on our fair value estimate of JPY 4,350. A wider volume decline of the lucrative probiotic yogurt drinks and persistent weakness in yogurt sales indicate that sales momentum is unlikely to rebound anytime soon. We, therefore, expect food profits to fall short of Meiji's renewed guidance but project the pharmaceutical business to beat the profit guidance, given strong influenza vaccine demand. We think Meiji’s profits may have bottomed and view shares, trading at a 23% discount to our fair value estimate of JPY 4,350, as undervalued. Apart from growth in China, whether it is able to restore sales volume and margins of the domestic probiotic yogurt business is critical to erasing the market’s concerns over the lack of growth drivers. Our profit estimates of fiscal 2023 ending March 2024 remain a touch below the guidance.