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Morningstar | NTT DoCoMo Price Cuts and Guidance Broadly in Line with Estimates

NTT DoCoMo’s fourth-quarter fiscal 2018 (quarter-ending March 2019) result was in line with our expectations as competitive intensity seems to be building ahead of Rakuten’s entry into the market in 2019. Fourth-quarter preimpairment loss operating income was up 1.3% compared with the 4.8% rise for the full year. Company guidance for the current financial year and the details of NTT DoCoMo’s medium-term mobile rate plan were broadly in line with our previous expectations. We make slight reductions to our forecasts but retain our fair value of JPY 2,500 and USD 22 per ADS. Our narrow moat rating is retained given forecast returns remain above WACC and our negative moat trend is also retained given the price cuts and forthcoming competition from Rakuten are likely to pressure returns with our operating profit forecasts declining in fiscal 2019 and fiscal 2020. NTT DoCoMo’s current share price is now slightly below our fair value and we would expect some share price volatility as shareholders digest the rate plans and await Rakuten’s entry. We lift our forecast dividend to a flat JPY 120 per share dividend over the next five years, from our previous JPY 110 per year given guidance for this financial year. With earnings forecast to decline slightly over this fiscal year and next, we are unwilling to forecast increased dividends, although with NTT DoCoMo’s very strong balance sheet it could well continue increase dividends gradually at its own discretion.

Management has guided for an 18% reduction in operating profit to around JPY 830 billion in fiscal 2019 due largely to new rate plans, the Gigaho and Gigalight, 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 plans. In fiscal 2018 NTT DoCoMo achieved efficiency savings of JPY 120 billion in line with its original target and is targeting a further JPY 130 billion in cost savings in fiscal 2019.

In addition, NTT DoCoMo will be spending on 5G and associated new service development given its plans to have a precommercial 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, before recovering toward to the JPY 990 billion target by fiscal 2023. Given the upcoming 5G expenditure, NTT DoCoMo’s fiscal 2019 capital expenditure guidance of JPY 570 billion, down from JPY 594 billion in fiscal 2018, is below our previous expectation of JPY 600 billion.

We will be interested to see the management guidance from NTT DoCoMo’s two big competitors (KDDI and SoftBank Corp) over the coming weeks. We could well see a situation where KDDI is the most profitable operator in the market, despite NTT DoCoMo being the largest. SoftBank Mobile might also be not far behind NTT DoCoMo in profitability. Given the high fixed cost nature of the telecommunications industry we normally see scale advantages for the largest operator. If this scenario plays out, NTT DoCoMo management will be under pressure to increase cost savings efforts to boost its profitability back above its smaller competitors.