PPIH Earnings: Strong Domestic Performance Drives Operating Profit Growth; Raising Fair Value

No-moat Pan Pacific International Holdings’ fiscal third-quarter results exceeded our estimates for revenue and operating profit, thanks to strong momentum in the domestic retail portfolio, while the overseas business remained under pressure. Strong tax-free and private-label sales drove gross margin expansion, while control in operating expenses further lifted operating margins. We lifted our 2024 revenue and operating profit projections by 1% and 4%, respectively, and increased our 2025-28 earnings forecasts by 2% due to the higher revenue base. We expect a lower operating margin in fiscal 2025 as government subsidies on utility costs cease, and we assume tax-free sales will decline as tourist arrivals peak out after this year’s rush. As a result, we have raised our fair value estimate to JPY 2,970 per share from JPY 2,840; this implies 21 times 2024 price/earnings, 11 times enterprise value/EBITDA, and a 0.7% dividend yield. We continue to view the shares as overvalued.