Goldman Sachs maintains Sell on Kirin Holdings, switches to SOTP but keeps target price unchanged

Overview

This report is a company research update by Goldman Sachs on Kirin Holdings. The key change is the shift in valuation methodology to SOTP, in order to incorporate differentiated valuations for diversified assets such as the beverage business, San Miguel Brewery, health science, and Kyowa Kirin. Although the health science business has achieved sustained profitability and momentum in the Japan and Australia businesses has improved, the report still believes the current share price already reflects these factors and that the valuation is above historical averages, therefore maintaining a Sell rating.

Core views

Goldman Sachs believes Kirin Holdings' current valuation is rich: the share price implies about 13.5x FY12/27E P/E, above the past three-year average of about 12x, while the target price of ¥2,400 implies about 12x FY12/27E P/E. The report points out that profits in FY12/26E-FY12/28E may receive a short-term boost from lower costs after Kyowa Kirin discontinued rocatinlimab development, but this factor does not represent an improvement in the quality of medium- to long-term growth. Improved profitability in the health science business, greater synergy potential, better momentum in the Japan and Australia businesses, and lower valuations for global beer stocks have largely narrowed Kirin's conglomerate discount.

Analysis framework

The report uses a sum-of-the-parts valuation method, taking FY12/27E as the valuation base year. The beverage business and San Miguel Brewery are valued at 7.8x average FY2E EV/EBITDA based on the past one-year average of global beer peers; the health science business is valued at 10.5x average FY2E EV/EBITDA based on the past one-year average of global health science peers; and Kyowa Kirin's enterprise value is calculated with reference to the 12-month target price of ¥1,900 derived by covered analysts based on a 12-year DCF.

Methodology notes

• Valuation methodSOTP

  Sum-of-the-parts valuation

  Kirin Holdings' different business segments are valued separately and then added together, with the aim of more accurately reflecting the differentiated value of assets such as beverages, health science, and pharmaceutical holdings.

• Relative valuationEV/EBITDA

  Peer multiple valuation

  The beverage business and San Miguel Brewery use 7.8x average FY2E EV/EBITDA based on the past one-year average of 10 global beer companies; the health science business uses 10.5x average FY2E EV/EBITDA based on the past one-year average of 7 global health science companies.

• Absolute valuationDCF

  Discounted cash flow valuation

  Kyowa Kirin's enterprise value is based on Goldman Sachs healthcare analysts' 12-month target price of ¥1,900, with relevant DCF assumptions including 6% WACC and a 0% terminal growth rate.

• Factor frameworkGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite factors

  The Goldman Sachs factor framework is used to compare individual stocks with the market and industry peers, covering growth, financial returns, valuation multiples, and composite percentiles.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kirin Holdings (2503.T)

  Research target

  Strengths

  Has diversified businesses including Japan beer, spirits, soft drinks, Australia alcoholic beverages, pharmaceuticals, health science, and North America bottling; the health science business has achieved sustained profitability.

  Weaknesses

  Current FY12/27E P/E is about 13.5x, above the historical average; the conglomerate discount has largely disappeared; changes in Japan's beer tax regime may pose adverse factors.

  Comparison

  The target price implies about 12x FY12/27E P/E, in line with the past three-year average, while the current share price is above that valuation level.

  Risks

  If health science growth, volumes, ASP, overseas business conditions, or post-investment synergies are better than expected, they could pose upside risk to the Sell rating.

• Beverage business and San Miguel Brewery

  Components of SOTP valuation

  Strengths

  Beer and beverage businesses are Kirin's core source of cash flow, and momentum in the Japan and Australia businesses is improving.

  Weaknesses

  Changes in Japan's beer tax regime may pressure the company, as it has a relatively high mix of low-malt and new-type beer.

  Comparison

  Valued at 7.8x average FY2E EV/EBITDA based on the past one-year average of 10 global beer companies.

  Risks

  Lower valuations for global beer stocks would depress the peer valuation benchmark; changes in volume or ASP would affect segment profits.

• Health science business

  Component of SOTP valuation

  Strengths

  The business has been generating profits on a sustained basis, and the market's recognition of synergy realization potential has improved.

  Weaknesses

  The sustainability of profitability and the pace of growth still need to be verified.

  Comparison

  Valued at 10.5x average FY2E EV/EBITDA based on the past one-year average of 7 global health science companies.

  Risks

  If growth is stronger than expected, it will become an upside risk to the target price and rating; if profitability falls short of expectations, it will weaken SOTP support.

• Kyowa Kirin

  Pharmaceutical asset and component of SOTP valuation

  Strengths

  After discontinuing rocatinlimab development, short-term cost declines support profits.

  Weaknesses

  Goldman Sachs healthcare analysts expect lower medium- to long-term sales and profit levels, and the short-term profit boost is not equivalent to an improvement in long-term growth.

  Comparison

  Enterprise value is based on the 12-month target price of ¥1,900, using assumptions of a 12-year DCF, 6% WACC, and 0% terminal growth rate.

  Risks

  Changes in the R&D pipeline, the sustainability of cost reductions, and medium- to long-term sales expectations will affect Kirin's overall SOTP valuation.

Key data

• 12-month target price¥2,400Based on SOTP valuation, the target price is unchanged.
• Current share price¥2,827Price disclosed on the report front page.
• Implied upside/downsideapproximately -15.1%Simply calculated based on target price of ¥2,400 and current price of ¥2,827, excluding dividends.
• Market capitalization¥2.3tn / $14.1bnDisclosed in Key Data of the report.
• Enterprise value¥3.4tn / $20.7bnDisclosed in Key Data of the report.
• 3-month average daily trading value¥9.5bn / $59.6mnDisclosed in Key Data of the report.
• Current FY12/27E P/E13.5xAbove the past three-year historical average of about 12x.
• Target price implied FY12/27E P/E12xBroadly in line with the past three-year historical average.
• Valuation multiple for beverage business and San Miguel Brewery7.8x FY2E EV/EBITDABased on the past one-year average of 10 global beer companies.
• Valuation multiple for health science business10.5x FY2E EV/EBITDABased on the past one-year average of 7 global health science companies.
• Reference target price for Kyowa Kirin¥1,900Based on the 12-month target price and DCF valuation of healthcare coverage analysts.
• M&A Rank3Under the Goldman Sachs framework, this indicates a relatively low probability of becoming an acquisition target.

Impact & implications

The switch in valuation methodology itself did not lead to a higher target price; instead, it reinforced Goldman Sachs' view that the current valuation already fully reflects the value of the diversified portfolio. For investors, the key implication of the report is that although profitability in the health science business and synergy potential have improved the conglomerate discount issue, the current share price is already above historical average valuation levels, and part of the profit improvement comes from one-off or temporary cost declines, so the risk-reward remains skewed to the downside.

Risks

• Upside risks to the Sell rating include higher-than-expected volumes, ASP improvement, better overseas business conditions, realization of portfolio company synergies, and profit improvement in key businesses.
• If the health science business grows more strongly than expected, it could prompt the market to reassess Kirin's long-term growth prospects.
• Changes in Japan's beer tax regime may create headwinds for the company, especially because its share of low-malt and new-type beer is higher than that of standard beer.
• The profit improvement from Kyowa Kirin discontinuing rocatinlimab development is short term; if the market extrapolates this into long-term earnings improvement, it could lead to valuation misjudgment.
• Changes in global beer stock valuations will affect the valuation multiples of the beverage business and San Miguel Brewery within SOTP.

What to watch

• Monthly data, volume, and ASP trends in the domestic Japan beer business.
• The impact of Japan beer tax adjustments on product mix and profit margins.
• Whether profitability in the health science business can be sustained, and whether synergies can be realized.
• Changes in Kyowa Kirin's profits, R&D pipeline, and medium- to long-term sales expectations after rocatinlimab development was discontinued.
• Whether momentum in the Japan and Australia businesses continues.
• Changes in peer valuation multiples of global beer companies and health science companies.
• Whether Kirin Holdings' conglomerate discount widens again or narrows further.