In this briefing:
- JDI: Share Price Continues to Slide Following Weak Earnings Outlook Due to US-China Trade War
- Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target
- SCSK (9719 JP) Launches Buyout of Subsidiary JIEC
- Toppan Printing: Money for Nothing (& Your Clicks for Free)
- Share Classifications: Jan 2019 Month-End Snapshot
1. JDI: Share Price Continues to Slide Following Weak Earnings Outlook Due to US-China Trade War
A Japanese newspaper recently reported that JDI is expected to post a consolidated loss for the current fiscal year. However, the company claims that the newspaper report was not based on any forecast made by JDI. The company has stated that it is currently calculating topline and bottomline for the third quarter and it expects the economic slowdown in China, prolonged user lifecycles for smartphones and the US China trade war to in fact have a greater than expected impact on the company’s financial performance. While its third quarter results are to be released in mid-February 2019, consensus expects the company to turnaround its losses to make an overall net profit for the year.
2. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target
Koito Manufacturing (7276 JP) released its 3QFY03/19 earnings that saw revenue outpace consensus estimates by +2%, while Stanley Electric (6923 JP) ’s revenue fell below consensus estimates by -1%. While Koito witnessed revenue growth of 10% YoY, Stanley posted a decline in revenue for the quarter by -4% YoY. On profitability as well, Koito witnessed growth of +6% YoY, achieving an OPM of 12%. Stanley, on the other hand, experienced a decline in OP for the quarter by -7% YoY, although still managing to achieve a relatively higher OPM of 13%. Here again, Koito managed to beat consensus estimates by +1% while Stanley fell below consensus estimates by -3%. Our conservative estimates for 3Q looked a bit light for Koito while they were slightly high for Stanley. Koito has been the company which usually disappoints the market with its earnings results, although it has proved otherwise this quarter.
That being said, it should be noted that, although Stanley’s three months ended results did not look particularly robust, its nine months ended results were quite favourable. The company witnessed the revenue grow 0.5% YoY (for the nine months ended 30th Dec 2018) while OP grew by 5.9% YoY, supported by the steady growth in the high-margin LED headlamps. For Koito, on the other hand, the three months ended results seemed quite favourable, although the nine months ended results displayed a revenue decline of -5.1% YoY and OP decline of -2.4% YoY, citing the deconsolidation of its Chinese subsidiary and the decrease in the volume of automobile production in some of its business regions as the key reasons. Thus, the overall YTD financial performance of Stanley looks still attractive compared to that of Koito. Following the earnings release, Stanley opened -3.7% down on Thursday from Tuesday’s close, while Koito closed +4.8% up on Wednesday since Friday’s close.
3. SCSK (9719 JP) Launches Buyout of Subsidiary JIEC
Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC Co Ltd (4291 JP).
SCSK currently holds 4,768,000 shares or 69.52% of voting rights.
The Tender Offer is at ¥2,750/share which is a 39.3% premium to the last traded price of the day before the announcement (¥1,974), a 38% premium to the one-month average, and a 41% premium to the 3-month and 6-month averages.
It is being done at about 7.5x TTM EV/EBITDA.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
4. Toppan Printing: Money for Nothing (& Your Clicks for Free)
TOPPAN PRINTING (7911 JP) is Japan’s current Negative Enterprise Value ‘champion’. Although only growing in the low single digits and with margins to match, comprehensive income margins and returns are significantly higher, as they take Toppan’s significant investment portfolio gains into account. The investment portfolio has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR).
MARKET MYOPIA – Despite the investment portfolio’s ¥411b contribution to Shareholder’s Equity, which has otherwise only increased by ¥98b, the stock market preferred to focus on the stagnating top-line, and the shares have been serial underperformers. Toppan’s market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. During this period, Toppan’s equity holdings rose from 43% of the company’s market capitalisation to close to parity at the recent market peak in September 2018.
BOTTOMING OUT – With the upcoming boost to sales in the printing business from the change in Japan’s gengō (元号) or era name on the accession of the new Emperor in April, the shares have finally broken out of a one-year period in the Oversold ‘doldrums’.
SELLING STRATEGIC INVESTMENTS – More importantly, the company has become more proactive in managing equity risk. On 23rd January, Toppan sold 10.5m shares in Recruit Holdings (6098 JP) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. Despite the boilerplate language used to describe the company’s strategy towards strategic shareholdings, Toppan has begun to address the portfolio more proactively and in accordance with the spirit of the new guidelines on Corporate Governance in Japan.
BUYBACK POTENTIAL – With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation, while the company has committed to capital expenditures totalling only ¥125b over the next five years. Toppan last conducted a modest 0.2% share buyback in 2015-Q2, which was ‘unwound’ by a 0.5% reduction in Treasury Stock in 2017-Q3, which was not accompanied by a share cancellation. With just 8% of shares outstanding held in treasury, there is ample room for further buybacks.
For Japan’s ‘Deep Value’ investors or even the ‘activists’, Toppan is an attractive opportunity.
In the DETAIL below, we list the ‘top’ twenty-five negative enterprise value companies in Japan and provide a brief overview of Toppan’s business, the investment portfolio and explain why, with apologies to our ‘Brothers in Arms’, Dire Straits, investors in Toppan are, at present, getting their ‘money for nothin’ and clicks for free’.
Dire Straits: Brothers in Arms/Money for Nothing – Knopfler/Sting – 1985
5. Share Classifications: Jan 2019 Month-End Snapshot
This month-end share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies.
This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:
1. 82 ADRs
2. 104 Korean Prefs
3. 22 Regional Dual Classes
4. 7 Foreign/Local Thai shares
The average premium/discount for each set over a one-year period is graphed below.
Source: CapIQ
For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.
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