Yakult Earnings: Profit Miss Bigger Than Expected; Yakult1000 Loses Steam and Asia Weakness Persists

Narrow-moat Yakult missed its profit guidance as expected but the fourth-quarter operating profit came in 11% below our forecast, as the decline in Yakult 1000 volume accelerated to a mid-teen percentage in March despite a 20% boost in production capacity in the quarter. Likewise, volume continued to contract at a double-digit pace in China and Indonesia although the decline narrowed quarter on quarter. We have finetuned our assumptions, which leave an immaterial impact on our fair value estimate of JPY 3,800. Whether the new initiatives in China and marketing campaigns for Yakult 1000/Y1000 in Japan will reverse the downward volume trend will be our focus. We continue to view Yakult's shares, trading at a 20% discount to our intrinsic value, as undervalued, but we acknowledge that the negative volume trend in core markets will continue to weigh on the near-term share performance.