Report
Dan Baker
EUR 850.00 For Business Accounts Only

Morningstar | NTT DoCoMo Results Strong but Rakuten Uncertainty Looms; FVE Retained at JPY 2,800

NTT DoCoMo’s first-quarter 2018 (quarter-ending June 2018) result was slightly above our expectations and puts the company in a good position to achieve or beat its own full-year guidance. First-quarter operating profit was up 9.9% while telecom services revenue was up 2.5% and mobile services revenue increased by 0.3%. Management plans to ramp up its cost reduction program in fiscal 2018 lifting targeted cost reductions to JPY 120 billion from JPY 90 billion in fiscal 2017, and JPY 34 billion was achieved in the first quarter so it is on track for this full-year target. The company has changed accounting standards from USGAAP to IFRS in fiscal 2019. Management has retained its fiscal 2018 forecasts of revenue of JPY 4.790 trillion and operating profit of JPY 990 billion representing 0.6% revenue growth and 0.3% operating profit growth on the newly disclosed fiscal 2017 numbers under the new accounting standard. Our fair value estimate is retained at JPY 2,800 and USD 26 per ADS. Our narrow moat rating is retained. NTT DoCoMo's current share price is broadly in line with our fair value, but we believe that investors will continue find NTT DoCoMo's dividend yield of 3.7% attractive compared with 10-year government bond yields of close to zero.

Core telecom operating profit in the fourth quarter grew by 8.8% to JPY 267 billion representing 86% of the firm's operating profit. NTT DoCoMo added 376,000 mobile customers this quarter which is ahead of the 132,000 added by KDDI with Softbank yet to report. Churn remained low at 0.65%, broadly in line with the 0.71% reported by KDDI in the same quarter, indicating that competition remains reasonably relaxed ahead of Rakuten's planned entry into the market next year.

Like many operators in the region, NTT DoCoMo saw very strong mobile traffic growth. Despite selling more Ultra Pack packages, the number of 1 gigabyte top-ups did not come down as expected. The success of the various product bundling initiatives undertaken by both KDDI and NTT DoCoMo is also underlined by the reduced churn.

Importantly for a dividend yield stock, NTT DoCoMo guided to a fiscal 2018 dividend of JPY 110 per share up from JPY 100 per share in fiscal 2017. In fiscal 2017, the company also spent JPY 300 billion to repurchase 111 million shares (around 2.8% of total pre-purchase shares). Given the company's conservative balance sheet with a net cash position of JPY 193 billion at June 2018, we see similar share buybacks as easily achievable in the future as many international telecom companies run balance sheets with net debt/EBITDA of 1-2 times.

In mid-December, 2017 Rakuten announced plans to raise debt to a maximum of JPY 200 billion to buildout a mobile network in Japan which would launch in 2019 with peak debt funding planned to reach JPY 600 billion by 2025 before the mobile business becomes free cash flow positive and can begin to paydown the debt. The business targets at least 15 million customers over an unspecified timeframe. In late April, Rakuten was given 20MHz of pair spectrum at 1.7 GHz and we expect it will build a network but at this stage we are far less confident that it will build a sustainable fourth operator business. Nevertheless, it could cause a price war while it attempts to build its customer base.
Underlying
NTT DoCoMo ADS

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

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Analysts
Dan Baker

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