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Elevator Pitch
My investment rating for Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY) [9432:JP] or NTT Corporation is a Sell.
In my prior update for NTT Corporation published on March 5, 2021, I wrote about “price competition in the Japanese mobile market” and “synergies between NTT Corporation and its new wholly-owned subsidiary, NTT Docomo.”
I turn my attention to NTT Corporation’s recent Q2 FY 2022 (YE March 31) financial performance in this latest article. NTT Corporation’s second quarter earnings fell short of expectations, and the company’s full-year guidance is lackluster. In addition, NTT Corporation’s valuations appear to be rich based on an evaluation of its historical EV/EBITDA multiples. As such, I assign a Sell rating to NTT Corporation.
Second Quarter Earnings Miss
NTT Corporation’s operating income and net profit for the second quarter of fiscal 2022 didn’t meet the sell-side analysts’ expectations.
According to the company’s most recent quarterly financial results announcement, NTT Corporation’s operating profit decreased by -5.7% YoY from JPY523 billion in Q2 FY 2021 to JPY493 billion for Q2 FY 2022. In comparison, the company’s operating income actually grew by +2.3% YoY and +3.5% YoY for Q2 FY 2021 and Q1 FY 2022, respectively. More significantly, its actual Q2 FY 2022 operating profit missed the sell-side’s consensus estimate of JPY531 billion (source: S&P Capital IQ) by -7.1%.
Similarly, NTT Corporation’s -2.3% YoY decline in net income to JPY328 billion in Q2 FY 2022 was a disappointment for the market. Before the company reported its recent quarterly earnings, analysts had predicted that NTT Corporation would announce a Q2 FY 2022 net profit of JPY348 billion as per S&P Capital IQ data. In other words, NTT Corporation’s bottom line fell short of the market’s expectations by -5.7%. Also, NTT Corporation had previously delivered positive YoY earnings growth for eight straight quarters running between Q2 FY 2020 and Q1 FY 2022.
Revenue Growth Was Strong And Above Expectations
NTT Corporation’s earnings miss for Q2 FY 2022 was driven by below-expectations profitability (to be discussed in the next section), and the company’s most recent quarterly top line growth was reasonably good.
Revenue for NTT Corporation increased by +4.8% QoQ and +7.4% YoY to JPY3,217 billion in the second quarter of fiscal 2022. In fact, the company’s top line growth had accelerated in a significant manner as compared to its YoY revenue increases of +1.7% and +6.1% for Q2 FY 2021 and Q1 FY 2022, respectively. More importantly, NTT Corporation’s Q2 FY 2022 sales exceeded the analysts’ consensus projection of JPY3,114 billion by +3.3%.
The company disclosed at its Q2 FY 2022 results briefing that its NTT DATA business was a key contributor to its overall top line increase in the recent quarter as a result of “robust demand for digitalization.” On its website, NTT DATA calls itself “a top 6 global business and IT services provider” with a presence in more than 50 markets around the world.
However, NTT Corporation’s strong top line performance didn’t translate into positive bottom line expansion, as I will explain in the subsequent section.
Higher Costs Hurt Profitability
As discussed in the earlier sections, NTT Corporation’s operating profit contracted on a YoY basis in the recent Q2 FY 2022, even though the company achieved positive sales growth.
The key reason for NTT Corporation’s weaker profitability is that the company was negatively impacted by higher expenses. Specifically, the company revealed at its Q2 FY 2022 investor call that the rise in the price of electricity had contributed to a -JPY30 billion drop in its operating income for the first half of fiscal 2022. As an indication of the extent that the actual increase in electricity prices had surprised the company, NTT Corporation previously factored in a +20% jump in the price of electricity for 1H FY 2022 but the actual electricity price went up by as much as +40%.
Management Guidance Wasn’t Encouraging
As per its Q2 FY 2022 financial results announcement, NTT Corporation has guided for a +2.9% increase in its operating income to JPY1,820 billion for full-year fiscal 2022. This suggests that management sees the company’s operating profit growth slowing in the current fiscal year. In comparison, operating income for NTT Corporation had increased by +7.0% and +5.8% for FY 2020 and FY 2021, respectively.
NTT Corporation expects to take another JPY30 billion hit to its operating profit in the second half of fiscal 2022. It is even more worrying that NTT noted at its most recent quarterly earnings call that it will be challenging to secure long-term electricity supply contracts as the company used to do in the past. This implies that NTT Corporation’s future profitability could be potentially impacted by the volatility in electricity prices to a larger extent than expected.
Bottom Line
I think that NTT Corporation’s shares warrant a Sell rating. The short term financial outlook for the company isn’t particularly exciting, and its shares aren’t exactly cheap. According to S&P Capital IQ’s valuation data, NTT Corporation currently trades at 6.4 times consensus forward next twelve months’ EV/EBITDA, which is significantly higher than the stock’s 15-year mean EV/EBITDA multiple of 4.3 times.
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.
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