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Morningstar | Japanese Telecom Industry Still Waiting for NTT DoCoMo Price Cuts

NTT DoCoMo’s third-quarter 2018 (quarter-ending December 2018) result was below our expectations as competitive intensity seems to be building ahead of Rakuten’s entry into the market in 2019. The industry is also still awaiting the details of the NTT DoCoMo’s bombshell medium-term plan announced at the previous result involving a review of mobile rate plans that will return up to JPY 400 billion to customers and see operating profit decline with a target of recovering operating profit to current levels by fiscal 2023. This is being done in response to government proposals around pricing and as a pre-emptive measure against the entry of Rakuten into the mobile network market. Having reduced our fair value to JPY 2,500 and USD 22 per ADS on the back of the medium-term plan announced at the second quarter result in November 2018, we make no further changes at this time. Our narrow moat rating is retained given forecast returns remain above WACC. Our negative moat trend remains given the price cuts are unforthcoming and competition are likely to pressure returns. NTT DoCoMo’s current share price is now above our fair value and we would expect some share price volatility as shareholders digest this new information. We also forecast flat JPY 110 per share dividends over the next five years given the medium-term plan.

NTT DoCoMo will continue with underlying cost-cutting which has been running at over JPY 100 billion per year so this should be able to absorb some of the impact of the new plan. In the first three quarters of this fiscal year, NTT DoCoMo achieved efficiency savings of JPY 98 billion and is on track to hit its full-year target of JPY 120 billion. However, the company’s guidance is for broadly flat overall operating profit this year and while it looks like it will probably beat this forecast by around JPY 40 billion, it is clear that without the cost-cutting profits would be falling.

In addition NTT DoCoMo will be spending on 5G and associated new service development given its plans to have a pre-commercial 5G service launched from September 2019 in time for the Rugby World Cup with a commercial 5G service launch in Spring 2020. The outcome is our forecast of NTT DoCoMo’s operating profit to fall to the mid JPY 800 billion range for three years from fiscal 2019 to fiscal 2021, a reduction of around 19% for fiscal 2020 and 2021, before recovering toward to the JPY 990 billion target by fiscal 2023.

Like competitor KDDi, NTT DoCoMo’s third-quarter results themselves were below expectations with competitive intensity apparently increasing ahead of the new entrant launch this year. Third quarter operating profit was down 1.6% (first half up 9%) while telecom services revenue was up 0.3% (first half up 1.4%) and mobile services revenue decreased by 1.3% (first quarter down 0.7%). Management has retained its full-year guidance for operating profit of JPY 990 billion and capital expenditures of JPY 590 billion.

Core telecom operating profit in the third quarter declined by 6.1% to JPY 243 billion representing 83% of the firm’s operating profit. NTT DoCoMo added 467,000 mobile customers this quarter, up from 304,000 in the second quarter and 317,000 in the corresponding quarter last fiscal year. Importantly for a dividend yield stock, NTT DoCoMo has guided to a fiscal 2018 dividend of JPY 110 per share up from JPY 100 per share in fiscal 2017. The company also completed another JPY 600 billion buyback from Nov. 7, 2018 to Dec. 7, 2018, no doubt mopping up some of the selling associated with the medium-term plan.