KDDI Corporation: The Good And The Bad (OTCMKTS:KDDIF)

Elevator Pitch

KDDI Corporation (OTCPK:KDDIF) (OTCPK:KDDIY) [9433:JP] is assigned a Hold rating.

My earlier January 26, 2024 article outlined KDDI Corporation’s recent developments such as the public listing of its Internet of Things platform business. I turn my attention to KDDIF’s financial outlook and shareholder capital return in the current write-up.

I continue to rate KDDI Corporation as a Hold. I find the stock’s high-single digit shareholder yield to be appealing, but I am unimpressed with the company’s near-term earnings growth prospects.

Readers should note that they can deal in the company’s shares on both the OTC (Over-The-Counter) market and the Japanese equity market. KDDI Corporation’s shares traded on the Tokyo Stock Exchange and the OTC market boasted mean daily trading values of $150 million and $4 million (source: S&P Capital IQ), respectively for the past 10 trading days. Investors can buy or sell KDDI Corporation’s relatively more liquid Japan-listed shares with US stockbrokers like Interactive Brokers.

The Bad Thing For KDDI Corporation Is Its Lackluster Financial Outlook

Earlier in May 2022, KDDI Corporation set a goal of expanding its earnings per share by +50% from JPY259.1 in FY 2019 (YE March 31, 2019) to JPY388.7 for FY 2025.

However, the company recently highlighted in May that it will only be able to achieve its +50% bottom line growth target in FY 2026, or one year later than what was expected. As indicated in its FY 2024 earnings presentation slides, KDDIF’s updated FY 2025 EPS guidance of JPY340 translates into a modest earnings increase of +5.6% for the new fiscal year.

There are two key factors contributing to KDDI Corporation’s below expectations fiscal 2025 bottom line guidance.

Firstly, KDDIF had initially anticipated that the ARPU (Average Revenue Per User) of the company’s mobile business would increase substantially, but this didn’t happen. KDDI Corporation disclosed at its FY 2024 results briefing that its ARPU rose modestly by +JPY20 (or $0.12) in the prior fiscal year.

It is likely that a slower-than-expected pace of 5G penetration and tougher competition have limited KDDIF’s mobile business ARPU growth.

The pace of 5G adoption in Japan appears to be much slower than another key East Asian peer, South Korea. Based on GSMA Intelligence’ estimates, the forecasted 2025 5G penetration rates for Japan and South Korea are 49% and 66%, respectively.

At the company’s fiscal 2024 earnings call, KDDIF acknowledged that “churn rate is getting higher” and “competition is getting more severe” for the Japanese telecommunications market as a whole, in response to an attendee’s observation that the “competitive environment seems to be becoming fiercer.”

Secondly, the performance of KDDI Corporation’s non-mobile businesses hasn’t lived up to expectations.

Previously, KDDIF targeted at least a +JPY100 billion increase in profit from its digital transformation, finance, and energy businesses for the three-year period between FY 2023 and FY 2025.

But KDDI Corporation only managed to deliver a +JPY47 billion growth in earnings for these key non-mobile businesses for the FY 2023-2024 time period. In other words, the company achieved less than half of its income expansion target for its non-mobile operations.

In its FY 2024 results presentation slides, KDDIF indicated that its energy business in particular has been growing at a weaker-than-expected pace as a result of “fuel price hikes.” The company’s energy segment runs a “electrical power retail business” as indicated in a prior news release. As such, it is easy to understand why KDDI Corporation’s energy business is negatively impacted by higher fuel prices.

It is reasonable to refer to KDDI Corporation’s financial prospects as lackluster.

KDDI Corporation is currently trading at 14 times trailing twelve months’ P/E. Using the rule of thumb that a Price-to-Earnings Growth or PEG ratio of 1.0 is indicative of fair valuation, the market expects KDDIF to register an earnings growth rate in the low-to-mid teens percentage levels. In contrast, KDDI Corporation’s expected FY 2025 revenue growth rate and FY 2025-2026 top line CAGR are +5.6% and +9.9%, respectively based on its financial guidance and targets. In other words, KDDIF’s projected bottom line expansion rates in the mid-to-high single digit percentage range aren’t as good as the low-to-mid teens percentage levels that the market demands.

The Good Thing For KDDIF Is Its Attractive Potential Shareholder Return

KDDI Corporation could possibly offer a potential shareholder yield at the high single-digit percentage level, assuming a shareholder capital return equivalent to 100% of its earnings.

On its investor relations website, in the investor Q&A (Question & Answer) section, KDDIY indicated that “the company’s total return ratio” for the future might be “up to 100%.”

With regards to dividends, KDDI Corporation aims to raise its dividend payout ratio from 43.4% in FY 2024 to 46.5% for FY 2025. This is consistent with the company’s policy of distributing a minimum 40% of its earnings as dividends every year.

In terms of share repurchases, the company is looking to buy back at least JPY300 billion worth of its own shares each year for both FY 2025 and FY 2026. This is equivalent to around 40% of KDDIF’s expected net profit for the next two years. In specific terms, the consensus FY 2025 and FY 2026 net income forecasts for KDDI Corporation are JPY708 billion and JPY754 million (source: S&P Capital IQ), respectively.

The company emphasized at its FY 2024 earnings briefing that it “is possible” to get to a “100% total payout ratio.”

To sum things up, it is reasonable to think KDDI Corporation will pay out between 80% and 100% of its earnings as buybacks and dividends in the coming years. This translates into a potential shareholder yield in the 6.3%-7.9% range for KDDI Corporation based on my calculations.

Closing Thoughts

I leave my existing Hold rating for KDDI Corporation unchanged, which takes into account both the good and bad things associated with the stock.

On the negative side of things, KDDI Corporation’s earnings-based valuations are unattractive with an implied PEG ratio of 1.4 times based on its trailing P/E ratio of 14 times and its forward FY 2025-2026 EPS CAGR of +9.9%.

On the positive side of things, the stock’s potential shareholder yield is enticing. Assuming that the company sticks to its minimum dividend payout ratio (40%) and minimum share buyback (JPY300 billion) guidance, the stock will offer a dividend yield of around 6.3%. If KDDI Corporation does allocate 100% of its net income to capital return, the stock’s shareholder yield could be as high as 7.9%.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.