Kao Earnings: Profits Soared on Expanded Price Hike Benefits and Eased Cost Pressure

Wide-moat Kao’s 4452 robust profit rebound boosts our confidence in its ability to restore margins and profitability. Third-quarter sales fell 1.6% (currency-neutral 3.9% decline) while core business profits soared 53%, thanks to expanded price-hike benefits and eased cost pressure. We are particularly encouraged by sizable margin improvement of the fabric and homecare business, Kao’s cash cow, as well as progress in price hikes. It appears that business profits are JPY 5 billion or 8% above its nine-month internal target. We have maintained our forecasts and fair value estimate of JPY 7,500. Kao remains our top pick of the Japan consumer sector, and we continue to view Kao’s shares as undervalued, indicating 41% upside from the close of Nov. 8.

Management also provided more details in the breakdown of JPY 60 billion of restructuring charges of which impairment losses of baby diaper’s production lines and expenses associated with early retirement/voluntary resignation account for 40%, while the rest will spread across cosmetics, toiletry, and chemical businesses for brand/SKU reorganization. It has booked another JPY 10 billion in charges for optimizing the production facilities of the domestic baby diaper business during the quarter and plans to book the rest of JPY 40 billion during the fourth quarter. Management estimates the staff restructuring will reduce the headcount by about 1,000. We project the staff cut will contribute to about half of JPY 15 billion annual cost savings to be delivered in 2025.