On-Trade Recovery and Last-Minute Demand Lifting Asahi’s Profits; Cost Pressure To Cap 2023 Growth

Narrow-moat Asahi posted a robust set of third-quarter results, with sales up 19% (currency neutral 13% growth) and core businsluess profit up 32%, thanks to continued on-trade recovery in Japan and Australia, and a spike in demand in Japan prior to the October price hikes. It appears that inflation has not triggered downtrading in these three core markets, although we think it is too early to tell whether the impact of inflation may become more evident in Japan and Europe from the fourth quarter. While Asahi looks set to meet its full-year profit guidance, as cost pressure would further escalate into 2023, we have reduced our 2023 profit estimate by 4%, and project profit to exceed the pre-COVID-19 level in 2024. The adjustments have an immaterial impact on our fair value estimate of JPY 6,000, implying attractive 40% upside to our valuation. Despite heightened risks concerning recessions in Europe and persistent cost pressure, we believe that Japanese consumers’ shift to beer, driven by tax cuts, will work in Asahi’s favor over the next few years given its commanding lead in the beer category.