NTTYY - NTT: Watch Shareholder-Friendly Moves And Data Center Growth

2023-11-27 10:13:06 ET

Summary

• NTT Corporation's stock split and share repurchases provide support for my view that the company is shareholder-centric.
• I think that NTTYY's data center business can meet its target of registering an EBITDA of JPY180 billion in 2027 because the worldwide data center colocation market's prospects are good.
• A Buy rating for NTT Corporation is maintained on the basis that NTTYY pays attention to the interests of shareholders, and that its long-term financial goals are achievable.

Elevator Pitch

Nippon Telegraph and Telephone Corporation (NTTYY) [9432:JP] or NTT Corporation shares are awarded a Buy investment rating. I like the company's recent actions such as its share split and its continued buybacks. I am also impressed with the strong historical growth and aggressive investment plans for the data center business.

Investors should note that they have the choice of dealing in either NTT Corporation's over-the-counter shares or the company's Japan-listed shares. NTT Corporation's shares traded on the OTC market and on the Tokyo Stock Exchange boasted three-month average daily trading values of $3 million and $180 million (source: S&P Capital IQ ), respectively. Readers can buy or sell NTT Corporation's Japan-listed shares with US brokerages which provide trading access for the Tokyo Stock Exchange like Interactive Brokers.

NTT Corporation Is Shareholder-Centric As Seen With Recent Moves

The company's efforts relating to share split and capital return suggest that it cares about the interests of its shareholders.

In my earlier July 10, 2023 article , I noted that "NTT Corporation's Japan-listed shares with the 9432:JP ticker had experienced a 25:1 stock split at the end of June this year" with the aim of lowering "the minimum cost of investment." This motivates existing shareholders to raise their respective stakes in the company and also brings in a new set of shareholders.

NTT Corporation published a new investor presentation this month, which shared more details about the positive impact of its recent share split. In the November 2023 investor presentation slides, NTT Corporation revealed that the company's shareholder base grew by +59% from 920,000 in March 2023 to 1.46 million by September of the current year. Also, investors aged 40 or below accounted for as much as 40% of NTT Corporation's shareholders in September 2023, as opposed to a modest 10% at the end of 2020.

Based on the numbers disclosed above, it is fair to say the share split in mid-2023 has been a success for NTT Corporation. A growing number of investors have bought into the company's shares, and the shareholder mix has changed with a larger number of younger investors.

Separately, NTT Corporation has made good progress with its plans to return excess capital to the company's shareholders.

As of end-October 2023, NTT Corporation has already completed about 40% of its existing share buyback plan. The company initiated a new JPY200 billion share repurchase program in early August this year, and this buyback plan expires at the end of March next year. NTT Corporation spent JPY80 billion buying back 464 million of its own shares between August 10, 2023, and October 31, 2023. An assessment of the current pace of share repurchases suggests that the company is on track to complete its share buyback program in full by end of the first quarter of calendar year 2024.

The company refers to fiscal 2023 as the financial period starting on April 1, 2023, and ending on March 31, 2024. If the JPY200 billion share repurchase plan is completed by the first quarter of the following year, this translates into a decent 1.4% buyback yield. NTT Corporation's consensus FY 2023 dividend yield is 3.0% as per S&P Capital IQ data, so the company's total shareholder return yield will be boosted by its buybacks.

Data Center Business Will Help NTT Corporation Realize Its Financial Goals

NTT Corporation's goal is to increase its EBITDA from JPY3,290 billion in fiscal 2022 to JPY4 trillion for FY 2027. In other words, the company is targeting to deliver an additional EBITDA contribution of JPY710 billion on an annual basis.

I noted in my prior July 2023 update that "NTT Corporation has proposed to increase its annual investment in 'growth areas' from JPY1.0 trillion in FY 2022 to JPY1.5 trillion for the FY 2023-2027 period" to drive its future financial performance. A key area of focus for the company is its data center business. NTT Corporation mentioned in its November 2023 investor presentation that it plans to invest a total of JPY1.5 trillion (or JPY300 billion per year) in the company's data center operations over the next five years to grow yearly EBITDA for this business from JPY80 billion for FY 2022 to JPY180 billion in FY 2027.

In the company's 2023 Investor Day presentation slides , NTT Corporation cited forecasts from research firm Structure Research indicating that the worldwide data center colocation market is projected to expand by a +13.5% CAGR from $50.8 billion in 2020 to $136.8 billion in 2028. The company's data center business is poised to benefit from the growth in the global data center colocation market by virtue of being the third biggest player boasting a 6% market share.

NTT Corporation stressed at its 2023 Investor Day (transcript sourced from S&P Capital IQ) in October this year that the company's data center business is estimated to deliver a revenue CAGR of +26% for the FY 2020-2023 time frame, which is roughly twice as fast as the industry's expected annualized growth rate (+13.5%).

My opinion is that NTT Corporation's data center business is well-positioned to meet its FY 2027 financial targets (JPY180 billion EBITDA) because it is a leading player in a growing market.

Final Thoughts

The favorable growth prospects for NTT Corporation's data center business increase the odds of the company delivering on its JPY4 trillion EBITDA goal by FY 2027. NTTYY has also made moves like sustained share repurchases and a stock split which indicate that the company is shareholder-friendly. As such, I continue to view NTT Corporation's shares as worthy of a Buy rating.

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