Daily Value Investing: NTT Buybacks Will Roll On and more

In this briefing:

1. NTT Buybacks Will Roll On
2. Chinese Telecoms: Recent Meetings Suggest a Benign Capex Outlook, but There Are Risks over 5G.
3. Taisho Frontrunner to Acquire BMS’s French OTC Business

1. NTT Buybacks Will Roll On

There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc. 

One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.

Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.

This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs. 

2. Chinese Telecoms: Recent Meetings Suggest a Benign Capex Outlook, but There Are Risks over 5G.

At recent meetings with the Chinese operators and China Tower (788 HK), Alastair Jones came away convinced the operators were not looking at a massive 5G capex burst in 2019. However, Alastair also worries that in the end, the decision is not made by the operators but with an eye to larger policy issues. With Huawei/ZTE under pressure and the China/US trade was simmering the risks to capex have increased. That said, we do not expect large scale 5G capex in 1H19 and with capacity utilization of the networks low their may even be room for further capex declines.  We look for more details of 5G plans to be released in 1Q19.

3. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)