We initiate coverage of Kikkoman Corp (2801 JP) with a fair value estimate of JPY 3,450, and assign it Narrow Moat and stable moat trend ratings. Shares are currently fairly valued. Robust growth momentum in the overseas business and potential margin enhancement for domestic food seem to have been fully priced in. Our fair value estimate implies fiscal 2018 price/earnings of 27.5 times and enterprise value/EBITDA of 13.5 times, with shares trading at a 15%-20% premium to the sector average and slightly above its historical average. In our view, the lucrative soy sauce business, which earns a 20%-plus operating margin in North American, with stable free cash flow generating a 3% yield, justifies the premium.

We think the food business has a narrow moat underpinned by intangible assets. Specifically, the intangible assets encompass brand equity and an entrenched retail relationship, backed by product development and marketing capabilities. A leading 35% share in the highly fragmented domestic soy sauce market empowers research and development and marketing investments that enable Kikkoman to adapt to consumers’ changing needs. The moat trend looks stable, given a favorable pricing environment across core markets, which is critical to cash flow funding investment in new product rollouts and brand-building efforts.

Analyst: Jeanie Chen

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