To The Moon

$Kirin Holdings Co., Ltd.(KNBWY)$ $Kirin Holdings Co., Ltd.(KNBWF)$$NASDAQ(.IXIC)$  $DJIA(.DJI)$  $S&P 500(.SPX)$  

Kirin Holdings Company, Limited is a Japan-based company in the integrated beverage as well as pharmaceutical and health science businesses. The Company operates in five business segments: Japan Beer & Spirits, Japan Non-alcoholic Beverages, Oceania Adult Beverages, Pharmaceuticals and Other, which contribute to 32%, 12%, 13%, 21% and 22% to overall FY23 revenue. Its beverage brand portfolio includes its Kirin Ichiban, Lion, Gogo-no-Kocha and Nama-cha amongst others. For its pharmaceutical business, it is focused on development and sale of drugs targeting diseases with no effective treatments. Its Other segment includes Mercian (wine), Coke Northeast (US soft drink bottler), and Kyowa Hakko Bio (dietary supplement). It also has two major associates: FANCL (cosmetics and health food) and San Miguel brewery (Philippines beer joint venture with San Miguel).

Investment Overview

Key Vision 2027; Focus on health-related businesses. Kirin is currently in the second stage of its Key Vision 2027 (KV2027), which is termed as its 2022-2024 Medium Term Business Plan (MTBP). Management has identified growth tracks and intends to focus on three domains – Food & Beverage, Health Science, and Pharmaceuticals. On Food & Beverage, it is planning to expand its Health Science product mix within the Food & Beverage domain with beverages that boost immunity. In the past year, it has acquired two companies Blackmores (a major Australian vitamins maker with JPY32bn revenue in FY23) for JPY166bn and Orchard Therapeutics (a UK based late-stage biotech company with potential JPY38bn annual sales opportunity in US and EU for its recently approved rare genetic disease treatment) for JPY54bn to beef up its Health Science and Pharmaceuticals domains respectively. It remains on the lookout for new acquisitions to strengthen its Health Science domain.

Expect flattish FY24 in terms of normalized operating profit with growth led by Health Science segment being offset by higher R&D costs in pharmaceutical segment. The company currently expects normalized operating profit to be flat y-o-y in FY24F, while profit attributable to owners of company is forecast at JPY131bn, +16% from FY23 coming from other non-core net income and its associates. Operating profit growth is expected to be led by Health Science division specifically from contribution of newly acquired Blackmores business and reduced losses at Kyowa Hakko Bio whereas its pharmaceuticals division will see significant jump in R&D expenses with inclusion of Orchard Therapeutics, a late-stage biotech company (acquisition completed on 24 Jan-24).

Concerns on overpaying for acquisitions in attempt to hasten its Health Science pivot, which could limit future shareholder returns. In an aggressive move to bolster its Health Science domain, it acquired Blackmores at a hefty premium, 23.1x EV/FY22 EBITDA, which opens the potential for significant goodwill write-offs (JPY67bn in goodwill). In addition, the company has signalled to the market that it would be allocating more cashflow towards M&A acquisitions to strengthen its Health Science domain, with higher leverage in consideration if required. We believe the market could be concerned about potential non-accretive acquisitions down the road.

A key upside risk more visible profitability growth trajectory for health science category without overpaying for acquisitions; downside risk on further loss of market share in core Japan and Oceania markets.

We believe the stock will re-rate higher should the company be able to demonstrate a more measured approach towards acquisitions and transform the Health Science domain into a significant profit center.

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DYODD