NTT Corporation: All Eyes On Price Competition And Potential Synergies
Summary
- NTT Corporation's 3Q FY 2021 financial performance was better, but the market is more worried about the negative effects of price competition in the Japanese mobile market.
- There are hopes of synergies between NTT Corporation and its new wholly-owned subsidiary, NTT Docomo, but the company has yet to disclose official numbers and targets.
- NTT Corporation trades at 9.2 times consensus forward FY 2022 P/E, and it offers a consensus forward FY 2022 dividend yields of 4.0%.
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Elevator Pitch
I maintain my Bearish rating on Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY), or NTT Corporation.
This is an update of my initiation article for NTT Corporation published on De. 22, 2020, and the company's share price has increased marginally by +2% from JPY2,666.50 as of Dec. 21, 2020, to JPY2,722.00 as of March 4, 2021. NTT Corporation currently trades at 9.2 times consensus forward FY 2022 (YE March 31) P/E, and it offers a consensus forward FY 2022 dividend yields of 4.0%.
NTT Corporation's 3Q FY 2021 financial performance was better as compared to 1H FY 2021, but the market is more worried about the negative effects of price competition in the Japanese mobile market. Also, while there are hopes of synergies between NTT Corporation and its new wholly-owned subsidiary, NTT Docomo, but the company has yet to disclose official numbers and targets.
Taking into account these factors, I retain a Bearish rating on NTT Corporation.
The average daily trading value for NTT Corporation's Japan-listed shares in the past three months was close to $200 million, while its OTC shares have relatively lower trading liquidity with three-month average daily trading value of approximately $4 million. Readers can trade directly in Japan-listed shares via US stockbrokers such as Fidelity or Interactive Brokers which offer access to key Asian stock markets.
3Q FY 2021 Results Were Better But Price Competition Remains A Concern
NTT Corporation announced the company's 3Q FY 2021 financial results on Feb. 25, 2021, and its financial performance in the most recent quarter was much better as compared to 1H FY 2021. As a point of clarification, I'm referring to the financial year between April 1, 2020 and March 31, 2021 as FY 2021, while NTT Corporation refers to the same period as FY 2020 in the company's earnings releases and presentations.
The company reversed from a -3.0% YoY revenue decline in 1H FY 2021 to a +1.8% YoY growth in its top line in 3Q FY 2021. NTT Corporation's operating income also grew by +7.2% YoY in the third quarter of FY 2021, and this is much better than the company's +2.6% YoY growth in operating income for 1H FY 2021. More importantly, NTT Corporation turned around from a -1.1% YoY decline in its net profit attributable to shareholders in 1H FY 2021 to a +9.6% YoY increase in its earnings in the most recent quarter.
The bright spot for NTT Corporation in 3Q FY 2021 was the company's Data Communications business, which saw a +16.1% QoQ expansion in operating income in the third quarter of FY 2021. But investors are more concerned about the future impact of stiffer-than-expected price competition on NTT Corporation's mobile communications business, or NTT Docomo (delisted in late December 2020).
On Dec. 3, 2020, Kyodo News reported that NTT Docomo will "introduce a 20-gigabyte monthly plan in March for 2,980 yen" called "ahamo", and it was noted that NTT Docomo's "similar data usage plan offering 30 gigabytes a month currently costs 7,150 yen." A recent March 1, 2021 The Japan Times news article highlighted that the monthly pricing for NTT Docomo's new ahamo mobile plan will be further lowered to JPY2,700.
Prior to the recent price change initiated by NTT Docomo, one of the company's competitors, SoftBank Corporation (OTCPK:SOBKY), already announced in mid-February 2021 that it will introduce a new 20GB mobile plan priced at only JPY2,480 per month. Also, another key mobile player in Japan, KDDI Corporation (OTCPK:KDDIF), also offers its 20GB mobile plan for a monthly charge of JPY2,480, while new entrant Rakuten, Inc. (OTCPK:RKUNY) has an even cheaper 20GB mobile plan priced at JPY1,980.
In response to the new mobile plans offered by its competitors and peers, NTT Corporation emphasized at the company's 3Q FY 2021 earnings call that "when it comes to network quality and the area of coverage and also after sales support, we hope the customers will take a look at this issue in a comprehensive manner." The company also stressed that "we need to communicate more about the appeal of our services" and "it is important that we continue to communicate our benefits to our customers." This seems to be an acknowledgement that NTT Corporation's cheaper new mobile plan will not be able to help the company gain market share and fend off competition.
On the positive side of things, the new ahamo mobile plan already has garnered more than one million subscribers as of February 2021, which is a decent start. NTT Corporation disclosed at the company's recent 3Q FY 2021 results briefing that it "had intended is to capture customers in their 20s and 30s" with the new ahamo mobile plan, and "the application from people in their 20s and 30s" did account for "a substantial portion of the applications."
But it's worth highlighting that even if NTT Corporation's new ahamo mobile plan turns out to be a success (notwithstanding similar offerings by competitors), it will likely have a negative effect on the company's future profitability. NTT Corporation revealed that it is doing "marketing-related" and "network-related cost reduction" to partially offset any impact from lower mobile tariffs as a result of the cheaper ahamo mobile plan. However, it is noteworthy that sell-side analysts expect NTT Corporation's operating profit margin to gradually decline from 18.9% in FY 2021 to 18.7% and 18.6% for FY 2022 and FY 2023, respectively.
Spotlight On Potential Synergies
NTT Corporation announced in mid November 2020 that it has completed the tender offer for the remaining 34% of the shares in its mobile business NTT Docomo that it didn't own previously. The spotlight is now on potential synergies between NTT Corporation and its new wholly-owned subsidiary, NTT Docomo, in areas such as cross-selling and cost optimization.
At the company's 3Q FY 2021 results briefing, NTT Corporation did not provide much details on the integration process between NTT Corporation and NTT Docomo. NTT Corporation will only highlight that "we are working on improving synergies with Docomo" and noted that it "will be in a position to make some sort of statements about this" at the announcement of the company's full-year FY 2021 results a few months later.
Notably, NTT Corporation did not directly acknowledge the JPY100 billion synergies figure that was quoted in the media and highlighted by sell-side analysts attending the 3Q FY 2021 earnings call. Instead, the company stressed that "we hope that we'll be able to indicate numbers as much as possible."
With actual numbers and financial targets with respect to synergies between NTT Corporation and NTT Docomo yet to be officially disclosed, I am cautious about incorporating any positive impact of synergies into my investment case.
Valuation
The market values NTT Corporation at 10.7 times consensus forward FY 2021 (YE March 31) and 9.2 times consensus forward FY 2022 P/E based on the company's share price of JPY2,722.00 as of March 4, 2021.
It also boasts consensus forward FY 2021 and FY 2022 dividend yields of 3.8% and 4.0%, respectively.
Market consensus sees NTT Corporation achieving consensus forward FY 2021 and FY 2022 ROEs of 10.8% and 13.1%, respectively.
NTT Corporation's forward ROEs are the lowest among its peers, which are a justification for the company's relatively lower forward P/E multiples as compared to peers.
NTT Corporation's Peer Valuation Comparison
| Stock | Consensus Current Year P/E | Consensus Forward One-Year P/E | Consensus Current Year Dividend Yield | Consensus Forward One-Year Dividend Yield | Consensus Current Year ROE | Consensus Forward One-Year ROE |
| KDDI Corporation | 11.3 | 11.0 | 3.7% | 4.0% | 14.5% | 13.7% |
| SoftBank Corporation | 13.6 | 12.8 | 6.1% | 6.3% | 49.1% | 46.6% |
Source: Author
I have sourced the sell-side consensus numbers used in this article from S&P Capital IQ.
NTT Corporation's key risk factors are stiffer-than-expected price competition, weaker-than-expected profitability, and synergies from the integration of NTT Corporation and NTT Docomo failing to meet market expectations.
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