Olympus: FY03/19 Affected by One-Time Expenses; Yet to See Any Major Change in Culture

Olympus: Key Businesses Continue to Grow; Shares Are Fairly Valued

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<p>Olympus Corporation is currently trading at JPY4,525 per share which we believe is overvalued based on our EV/EBIT valuation. The company generates nearly 80.0% of its revenue from its Medical Business where it is the global market leader for gastrointestinal endoscopes. Despite Olympus' market share and technology leadership, the segment has been hit by investigations related to its duodenoscopies and has been fined for violating safety regulations. In addition, the Medical Division is also subject to several bribery-related investigations by the US Department of Justice and could risk losing its market share if the allegations are proven given the industry is highly competitive. Meanwhile its Imaging Business which offers cameras and lenses, is operating in a contracting market, where the segment continues to see declining revenues and is loss making.</p>
<p>To add to all of the above, the company is under scrutiny for governance-related issues such as lack of board diversity as well as poor corporate culture. On the positive side, the management has announced a plan to transform its business, including appointing three new (non-Japanese) directors to its board, all due to the pressure from its largest shareholder ValueAct Capital. The Management has mentioned that they will be proposing one of the partners of ValueAct as one of the three new directors at its shareholder meeting in April 2019, which is encouraging. However, that being said, we are yet to witness any tangible improvement in the way the company has conducted itself since the exposure of its accounting fraud in 2011 and has not been able to stay free of controversy. Hence, in our opinion the hefty premium at which the shares are currently trading is not justified suggesting to us that the potential turnaround in governance quality is being priced in too fully at this point. It is uncertain what other skeletons may be in Olympus' closets and it seems premature to afford the stock a premium valuation.</p>

Olympus Corporation is currently trading at JPY4,525 per share which we believe is overvalued based on our EV/EBIT valuation. The company generates nearly 80.0% of its revenue from its Medical Business where it is the global market leader for gastrointestinal endoscopes. Despite Olympus' market share and technology leadership, the segment has been hit by investigations related to its duodenoscopies and has been fined for violating safety regulations. In addition, the Medical Division is also subject to several bribery-related investigations by the US Department of Justice and could risk losing its market share if the allegations are proven given the industry is highly competitive. Meanwhile its Imaging Business which offers cameras and lenses, is operating in a contracting market, where the segment continues to see declining revenues and is loss making.
To add to all of the above, the company is under scrutiny for governance-related issues such as lack of board diversity as well as poor corporate culture. On the positive side, the management has announced a plan to transform its business, including appointing three new (non-Japanese) directors to its board, all due to the pressure from its largest shareholder ValueAct Capital. The Management has mentioned that they will be proposing one of the partners of ValueAct as one of the three new directors at its shareholder meeting in April 2019, which is encouraging. However, that being said, we are yet to witness any tangible improvement in the way the company has conducted itself since the exposure of its accounting fraud in 2011 and has not been able to stay free of controversy. Hence, in our opinion the hefty premium at which the shares are currently trading is not justified suggesting to us that the potential turnaround in governance quality is being priced in too fully at this point. It is uncertain what other skeletons may be in Olympus' closets and it seems premature to afford the stock a premium valuation.

Olympus Corporation (7733 JP): Overvalued with Too Many Controversies