Wait for Re-rating Catalysts Continues, But Some Risks Seem Already Priced In

Research evidence excerpt

Wait for Re-rating Catalysts Continues, But Some Risks Seem Already Priced In

IdeaM

Key topics and stock recommendations

Industry fundamentals and valuations

Our existing view of industry fundamentals has not changed significantly:

1. There has been an increase in the number of companies for whom the worst is

over in terms of industry environment and earnings, but at the same time there

are not many firms with the prerequisites or earnings strength to raise the

probability of growth going forward. Overall there are still a lot of industry firms

with stories in “show me” territory. At the beginning of the year there were

multiple firms where market expectations ran ahead, but with developments in

the Middle East, as well as Oct-Dec and Jan-Mar results, expectations fell back. In

this environment, we recommend companies that are resilient on the earnings

front. Kao (4452.T) is our Top Pick from this perspective.

2. Given the risk of higher costs due to the situation in the Middle East, we are

concerned about adverse risk for toiletry firms in particular. However, cosmetics

companies also have an earnings structure that leaves them exposed to a negative

impact on operating profit from top line growth slowing or turning negative, and

thus it is important to be aware of the risk of consumer sentiment deteriorating.

Nonetheless, the industry overall has seen share prices undergo an adjustment, and we

believe further downside risk for both toiletry companies and cosmetics companies is

small. The long-term historical average P/E over the past 20 years (calculated based on

the FactSet consensus estimates at the respective period) is 23x for toiletries and 26x for

cosmetics. However, before 2015 (when the overall industry began to see valuation