EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage of SoftBank Corp with a Narrow Moat and a JPY 1,100 FVE

We initiate coverage on SoftBank Corp, or SoftBank, with a narrow moat based on efficient scale, a negative moat trend based on expected increasing price pressure in the Japanese mobile market, and a JPY 1,100 per share fair value estimate, implying a 2019 P/E ratio of 11 times. At current prices, we believe it looks slightly overvalued. The company made its initial public offering, or IPO, in the Tokyo Stock Exchange on Dec. 19 2018 after parent company, SoftBank Group Corp, sold shares in the IPO at JPY 1,500 per share. We believe Softbank has an economic moat based on efficient scale as the three incumbent telecom operators in Japan have strong advantages against a new entrant in terms of very large upfront costs to enter the telecom market and the ongoing expense required to win enough customers to make a new entrant network profitable. While Rakuten is entering the market in 2019, we do not expect that its planned investment levels will give it the scale to have a sustainable impact. However, it could negatively impact on mobile market pricing in the short term as price is the main potential differentiator for a telecom new entrant.

Our forecasts assume a five-year average revenue growth for SoftBank of 1.1% per year with broadly flat operating income over the same period, mainly due to expected price competition from both NTT DoCoMo's planned price reductions from the June 2019 quarter and Rakuten's entry into the mobile market. More successful cost-cutting from SoftBank focused on headcount could provide upside to these numbers. The parent company has geared SoftBank quite highly with net debt/EBITDA of 2.8 times and has set an 85% dividend payout ratio. The dividend yield is attractive but could prove hard to sustain if the expected pricing pressure eventuates.