Sunday, February 23, 2020

A Current AIM International Equity Holding: Nippon Telegraph and Telephone Corporation Sponsored ADR (NTTYY, $25.50): “Strategic Shifts Complement Original Drivers as Company Begins an Exciting Year”


Nippon Telegraph and Telephone Corporation Sponsored ADR (NTTYY, $25.50): “Strategic Shifts Complement Original Drivers as Company Begins an Exciting Year”
By: Adán Jiménez, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Nippon Telegraph and Telephone Corp. (OTCM: NTTYY) is the fourth largest telecommunications company in the world with a market cap of 92 Billion USD. The company was founded as a state monopoly in 1952 but was later privatized and began trading publicly in 1987. Naturally, it has remained the largest telecom company in Japan and currently serves about 80 million individuals and organizations including over 80% of the top 100 companies in the Global Fortune 500. It is headquartered in Tokyo.

• NTT operates globally but generates about 80% of its revenue from Japan, where companies and individuals alike value internet technology tremendously. NTT largely focuses on the provision of fiber internet connections instead of traditional cable packages. Fiber internet is much quicker and more reliable than cable, warranting premium pricing.

Japan continues to face low economic growth, even more so after a sales tax increase from 8-10% in October. An aging population and plans of hiring more skilled employees in an extremely low unemployment environment presents further challenges. Internationally, the company has continued to increase its footprint and has stated that they have plans of increasing capital investment significantly in 2020.

Key points: 

NTT has established itself as a massive value company. It controls most of the market in Japan and has a stake in over 70 countries in the world. Still, the telecom industry is well into its maturity stage and revenue growth is low. Management has stated that they are shifting their strategic focus on rationalization of company operations as well as expansion in high margin segments. In FY Ended March 2019, NYY increased operating profit in each of its major segments—including a 20% increase in the data communications segment.

The telecom industry is facing increasing competition from tech companies like Google, who have recently launched an initiative to supply companies with fiber optic internet services. NTT has recognized that they need to make innovative strides to combat new competition and have done so in a several ways. NTT has signed an agreement with Yokohama, the second largest city in Japan, to implement AI and big data to provide government solutions that match the needs of its residents. The company also has plans to have 5G coverage across Tokyo this year and unveil its smart stadiums at the 2020 Olympics which will provide fans Wi-Fi connectivity, the ability to livestream multiple events at once, and even order food from their phones.

NTT has rapidly increased its strategic focus on building data centers internationally. Data centers are physical spaces that house the computer technology that serve as the infrastructure for many business networks. There is currently a high level of competition in this space, but management recognizes it as an opportunity for bottom line growth.  In order to rationalize operations, the company plans to expand these operations in areas that clients have expressed high demand and sell off centers in underperforming segments.

What has the stock done lately?

Following the Q3 earnings call on February 6th NTT stock dropped 2%, likely because the company reported a decrease in operating income of 70 million USD YoY. This drop is largely immaterial as short-term volatility in a large cap stock is expected.


Source: FactSet

Past Year Performance:

NTT stock has increased 23% this year and is hovering near its all-time high of $26.27 in November of 2017. The stock price rose steadily following the end of FY2018 and especially after the annual report was released in early May 2019. Some of the highlights of the annual report include a 3.2% increase in operating profit, a 5.8% increase in revenue and 20% increase in operating profit of the Data Communications segment, and strong plans of global expansion, rationalization, and innovative transformation.
Source: FactSet
My Takeaway

Nippon Telegraph and Telephone Corp. was added to the AIM International Equity Fund in February 2018 at $23.90* with a price target of $25.96*. Although the stock has only returned 6.7% since its addition, the original drivers continue to yield value. One of these drivers is Nippon’s B2B2X (Business to Business to End User) strategy in which NTT provides the infrastructure necessary for service providers to better serve their customers with high-speed fiber networks. This is playing a major part in the company’s involvement in the 2020 Olympic Games in Tokyo, which will be a time of high visibility where NTT can showcase its powerful technology. Nippon also shows promise of increased global expansion as management has recognized opportunities in high margin areas (particularly data centers) and plans to make major capital investments in strong markets. If the company continues to implement innovative strategies that combat the changing industry with the power of their massive resources, it will be well positioned to derive shareholder value. 2020 looks to be a promising year where many of the original drivers of this stock will begin to unfold more visibly and for these reasons, it is recommended that NTT be held in the AIM International Equity portfolio.
*these numbers have been adjusted following a 2-for-1 stock split in December 2019

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