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Morningstar | SoftBank Corp Reports Solid Guidance and Increases Stake in Yahoo Japan; FVE Increased to JPY 1,200

SoftBank Corp’s 2018 result (quarter-ending March 2019) was slightly below our estimates with revenue increasing by 4.6% and operating income increasing by 12.8%. The company also announced its intention to acquire all of the 1.511 billion new shares to be issued by narrow-moat-rated Yahoo Japan for JPY 456.5 billion, increasing its stake in the company from 12% to 45% and moving to consolidate Yahoo Japan in its accounts from April 1, 2019. The transaction is expected to close by the end of June 2019. SoftBank’s management guidance for EBIT to increase by 3.5% to JPY 890 billion this year implies a core business (ex-Yahoo) EBIT forecast of around JPY 745 billion, using the midpoint of Yahoo Japan’s own guidance for this year. This would imply a 3%-4% increase in underlying SoftBank’s EBIT which was above our forecast of a slight EBIT decline. However, we expect NTT DoCoMo’s price cuts and Rakuten’s entry into the market to put pressure on mobile pricing so we believe SoftBank will likely have to tweak its prices down in certain areas to compete with NTT DoCoMo and Rakuten. SoftBank management believes that it will be able to respond to foreseeable price declines with fine tuning of prices given it already has three brands in the market place and its lower priced Y!mobile brand is very competitive. But it did indicate that it would need to wait to see what pricing plans Rakuten comes up with later this year.

We update our model to consolidate Yahoo Japan post this result with our fair value estimate increased to JPY 1,200 per share from JPY 1,100 per share, due to slight upgrades in forecasts, the time value of money, and because Rakuten is purchasing its stake in Yahoo Japan at a 16% discount to our fair value of JPY 360. At this fair value, SoftBank would trade on a price/earnings ratio of 11.1 times with a 7.1% dividend yield. Adhering to its pledge to keep the dividend payout ratio at around 85% SoftBank forecast an JPY 85 dividend for this fiscal year.

We believe the Japanese telecom market is a solid three-player market with manageable competition levels but this looks likely be challenged by both Rakuten’s planned entry as a network operator in 2019 and the Government’s influence over operator pricing. Our operating profit forecasts over the next five years assume around 1% per year decline for SoftBank’s core telecom business but around 6% growth in Yahoo Japan. We retain our narrow moat rating based on cost advantage and efficient scale in SoftBank’s core telecom business and our negative moat trend based on Rakuten and the expected upcoming pricing pressure. SoftBank’s shares are trading above our revised fair value estimate and we prefer KDDI which is trading on a 20% discount to SoftBank, based on forward price/earnings despite being similar companies in the same market with KDDI deploying a far more conservative balance sheet than SoftBank. SoftBank’s Net Debt to EBITDA is around 2.5 times compared with KDDI at around 0.5 times.