Asahi Earnings: Strong Profit Growth Lifted by Successful Price Hikes and On-Trade Recovery in Japan

Narrow-moat Asahi Group Holdings’ 2502 double-digit profit growth in the first quarter was no surprise following rival Kirin’s strong results. Core profits, in particular for the domestic brewery and beverage business, came in ahead of the company’s internal targets thanks to successful prices hikes with limited volume impact and continued on-trade volume recovery. While cost increase was in line with guidance, management has taken a cautious stance on the profit outlook for the rest of the year given uncertainty surrounding consumer sentiment in the core markets and commodity price trends.

We maintain our forecasts and fair value estimate of JPY 6,400, and continue to view shares as undervalued even after a 30% rally over the past four months. Solid domestic profit recovery supports our thesis that favorable excise tax rates imposed on beer will continue to prompt consumers to shift to beer, a product in which Asahi holds a commanding lead and enjoys an economic moat. Our profit forecasts are a touch above the 2024 guidance.

First-quarter sales grew nearly 8% (reported 12% growth) year on year while business profits (gross profits minus SG&A) climbed 24.3% (31% growth), stemming from a sizable profit gain in Japan and Europe. Apart from successful price hikes, on-trade volume recovery in Japan has been trending above management’s expectation, at close to 70% of the pre-Covid level as we expected. While management reckoned that additional JPY 2 billion costs may be incurred in the second half, profit growth remains healthy in midteens excluding the timing factor. The cost outlook was the center of topics raised during the earnings call. The JPY 25 billion increase year on year is on track to meet its JPY 100 billion budget target. While management avoided comments on the cost outlook for 2024, we anticipate a sizable drop, a key profit driver behind our forecast of low-double-digit growth for 2024, given price corrections of many commodities used as raw materials.