NTT Is A Defensive Play For 2023 (OTCMKTS:NTTYY)

Elevator Pitch

I have a Buy rating for Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY) [9432:JP] or NTT Corporation.

I touched on NTT Corporation’s second quarter financial results and full-year fiscal 2022 (the April 1, 2022 to March 31, 2023 period) management guidance in my earlier November 17, 2022 write-up.

I upgrade my investment rating for NTT Corporation from a Sell previously to a Buy now. 2023 will be a tough year for many listed companies due to the challenging economic environment, and NTT Corporation belongs to a minority group of stocks which can still register stronger top line growth and earnings expansion in the new year.

FY 2023 Financial Outlook

The World Bank has recently lowered its global economic growth projection for 2023 from +3.0% previously to a modest +1.7% now. It is likely that a fair number of companies worldwide will suffer from slower top line expansion and a decline in earnings. NTT Corporation is one of the notable exceptions, with expectations of faster revenue growth and an increase in its bottom line for the coming year.

NTT Corporation’s revenue expansion is forecasted to accelerate from +1.8% in FY 2022 to +5% for FY 2023 in JPY or local currency terms as per S&P Capital IQ’s consensus financial data. Analysts also predict that NTT Corporation will register a reasonably decent +6% earnings growth in the new fiscal year. It is natural that a defensive stock such as NTT Corporation will be favored by many investors.

In the subsequent sections of the article, I outline the various factors that will contribute to NTT Corporation’s bottom line expansion for FY 2023.

Top Line And Costs

There are three key revenue growth drivers for NTT Corporation that are worthy paying attention to.

Firstly, NTT Corporation should start delivering positive mobile ARPU (Average Revenue Per User) growth in fiscal 2023.

The company guided at its Q2 FY 2022 earnings briefing in November that its mobile ARPU “is going to hit the bottom” within fiscal year 2022. Mobile ARPU growth for NTT Corporation will be driven by an increase in the number of its subscribers taking up 5G plans and larger data plans.

NTT Corporation is targeting to increase its mobile subscriber 5G take-up rate from the current 30% to as high as 50% by the end of full-year fiscal 2022. At the same time, NTT Corporation also indicated in its December 2022 investor presentation that it is working very hard to up-sell larger data plans (which boast higher ARPUs) to its current subscribers.

Secondly, it is highly probable that NTT Corporation will grab subscriber share from its key rivals in the near future.

KDDI Corporation (OTCPK:KDDIY) (OTCPK:KDDIF) was hit by “disruptions on up to 39 million mobile connections” in the middle of last year, as highlighted in a July 4, 2022 Nikkei Asia news article. It is reasonable to assume that some of KDDI Corporation’s mobile subscribers will consider switching to other mobile companies after the unfortunate incident. Separately, Rakuten (OTCPK:RKUNY) (OTCPK:RKUNF) has become less aggressive with the expansion plans for its mobile business. Rakuten has recently decided to reduce its mobile store footprint by -21% to 1,000 stores, which should allow NTT Corporation to gain new subscribers at Rakuten’s expense.

Thirdly, NTT Corporation has set a goal of growing its Smart Life revenue by +100% between FY 2021 and FY 2025, and its target is to have its combined Smart Life and Enterprise revenues represent half of its top line by FY 2025.

The company’s Smart Life business comprises of payment services (d-pay mobile app), XR (Extended Reality) offerings, and online medical services among others. In a nutshell, NTT Corporation’s Smart Life business allows the company to explore various new opportunities that it could offer to its existing mobile subscriber base. NTT Corporation’s enterprise services should witness strong demand, as a result of companies focusing on digital transformation.

In summary, NTT Corporation can leverage on multiple drivers to support its accelerated top line growth in 2023.

Separately, NTT Corporation stressed at the company’s second quarter investor call that “we will accelerate our cost efficiency program.”

Earlier in 2018, NTT Corporation outlined its target of realizing cost savings amounting to JPY800 billion between fiscal 2017 and fiscal 2023, and it is encouraging to see that the company has already met this initial expense management goal (cumulative savings of JPY800 billion) by fiscal 2021.

In its December 2022 investor presentation, NTT Corporation guided that it is able to generate expense reductions amounting to JPY200 billion for FY 2023. The company’s good track record in delivering on past cost cutting targets gives me confidence that it can meet its fiscal 2023 expenses target.

Share Repurchases And Valuations

At the beginning of this year, NTT Corporation announced that it has spent close to JPY22 billion buying back 5.8 million of the company’s shares between early-November and the end of December last year.

NTT Corporation can potentially spend an additional JPY128 billion on additional share repurchases in the first three months of calendar year 2023 based on its share buyback authorization which is equivalent to 1.2% of its shares outstanding.

The company’s share buybacks are important for two key reasons.

The first reason is that share repurchases can help to boost NTT Corporation’s EPS growth in 2023 and beyond.

NTT Corporation has shrunk its number of shares outstanding from above 5 billion in 2010 to less than 3.5 billion in end-2022 (calendar year). Notably, NTT Corporation’s EPS grew by a +11.8% CAGR from JPY96.29 in FY 2010 to JPY329.29 for FY 2021, which exceeded the company’s net profit CAGR of +7.9% for the same period.

The second reason is that share buybacks are value accretive for NTT Corporation in view of its current valuations.

NTT Corporation currently trades at a reasonably attractive consensus forward FY 2023 P/E multiple of 10.4 times as per S&P Capital IQ’s valuation data. Moreover, NTT Corporation is valued by the market at a meaningful discount to its key peer KDDI, which is trading at 12.3 times forward FY 2023 P/E.

Closing Thoughts

NTT Corporation is a decent defensive stock pick which warrants a Buy rating. The company’s financial performance for fiscal 2023 is expected to be decent, and its valuations are undemanding.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.