MARUY - Marubeni Corporation: Mid-Teens ROE Warrants A Higher P/B Multiple

2023-12-13 10:37:47 ET

Summary

• Marubeni Corporation's stock price has the potential to rise in the future, assuming that it achieves an ROE of 15% for both FY 2024 and FY 2025.
• Marubeni has key ROE drivers in place such as value-accretive portfolio restructuring moves and shareholder capital return initiatives.
• My rating for Marubeni Corporation is a Buy, as I think that the company's mid-teens percentage ROE expectations justify an expansion of the stock's P/B multiple.

Elevator Pitch

I assign a Buy investment rating to Marubeni Corporation ( MARUY ) [8002:JP]. I think that Marubeni Corporation's shares have meaningful upside potential, as the market is likely to value the stock at a higher P/B ratio if the company delivers an ROE of 15% for both the current fiscal year and the next fiscal year. The company's ROE enhancement initiatives include accretive investments and divestments, and shareholder capital return plans relating to buybacks and dividends.

Investors should note that Marubeni Corporation's shares are traded on both the OTC (Over-The-Counter) market and the Tokyo Stock Exchange. The company's OTC shares with the MARUY ticker symbol boast a decent average daily trading value of over $1 million (Source: S&P Capital IQ ) for the past three months. Marubeni Corporation's Japan-listed shares with the 8002:JP ticker symbol have a relatively higher mean three-month daily trading value of close to $100 million as per S&P Capital IQ data. For readers who wish to trade in Marubeni Corporation's Japanese shares, they can engage the services of U.S. brokers which offer access to foreign equity markets like Interactive Brokers.

Company Description

Marubeni Corporation is one of "Japan's five largest trading houses" or conglomerates alongside ITOCHU Corporation ( ITOCF , ITOCY ), Mitsubishi Corporation ( MSBHF ), Sumitomo Corporation ( SSUMF , SSUMY ) and Mitsui & Co., Ltd. ( MITSY , MITSF ) as indicated in a June 19, 2023, Seeking Alpha News article . The company was founded in 1858 , and its shares have been listed in Japan since 1950.

MARUY's Main Business Activities

Marubeni Corporation's Key Business Divisions And Segments

Marubeni Corporation earned 43%, 21%, 18%, and 18% of its FY 2023 (YE March 31, 2023) normalized net income from its Materials, Energy & Infrastructure Solution, Transportation & Industrial Machinery & Financial Business, and Consumer Products divisions, respectively, as per its Integrated Report . The company's CDIO or Chief Digital Innovation Officer business division was loss-making in the most recent fiscal year.

ROE Guidance And P/B Multiple

I hold the view that Marubeni Corporation deserves to be valued by the market at a higher P/B valuation ratio, considering the expectations for the company's future ROEs (Returns on Equity).

In its Q2 FY 2024 earnings presentation slides , MARUY highlighted its FY 2024 (April 1, 2023, to March 31, 2024) ROE guidance of 15%. The current sell-side analysts' consensus FY 2024 ROE forecast for Marubeni Corporation is 14.98% (source: S&P Capital IQ ), which indicates that the market believes that MARUY has the ability to deliver on its mid-teens percentage ROE guidance for the current fiscal year. The company has also set a target of achieving a 15% ROE for FY 2025 as well, as revealed in its FY 2023 integrated report.

Marubeni Corporation is now trading at a trailing P/B multiple of 1.15 times based on S&P Capital IQ's valuation data. There are good reasons to believe that Marubeni Corporation stock can benefit from a positive valuation re-rating, if the company does generate a ROE of 15% for both FY 2024 and FY 2025.

Using the Gordon Growth Formula, the P/B ratio is derived by dividing [ROE minus the Perpetuity Growth Rate] by [Cost Of Equity minus the Perpetuity Growth Rate]. If one uses the assumptions of a 15% ROE, a 10% Cost of Equity, and a 0% Perpetuity Growth Rate, Marubeni Corporation warrants a 1.5 times P/B multiple. Assuming no change in book value, an expansion of Marubeni Corporation's P/B ratio from 1.15 times to 1.50 times translates into a potential upside of approximately +30%.

When the company previously registered mid-to-high teens ROEs on a consistent basis in the FY 2007-2010 (April 1, 2006, to March 31, 2010) time period, the stock's mean ROE during this time frame was 1.46 times (source: S&P Capital IQ ). MARUY's actual ROEs for FY 2007, FY 2008, FY 2009, and FY 2010 were 16.9%, 19.3%, 16.5%, and 14.5%, respectively.

In the subsequent two sections of this article, I touch on the key ROE drivers for MARUY, which makes me confident that Marubeni Corporation can generate an ROE of 15% in the current and following fiscal years.

Investments And Divestments

My opinion is that Marubeni Corporation can enhance its ROE by restructuring the company's business portfolio in a value-accretive manner via astute investments and divestments.

Firstly, MARUY has a sound approach with regards to capital allocation.

At its Q2 FY 2024 results call , Marubeni Corporation stressed that the company has "no strategy to simply use the funds obtained from asset sales immediately," but it will seek an "opportune moment to deploy those funds." MARUY also added at its most recent quarterly earnings briefing that "even profitable assets will be subject to divestment if they have poor investment efficiency", and shared that it will prioritize "capital and human resources" for "promising businesses."

MARUY's latest management commentary highlighted above suggests that the company places a strong emphasis on the right timing for both investments and divestments. Moreover, Marubeni Corporation is open to reviewing almost any asset or business (even those that aren't loss-making) for potential monetization, so as to allocate more capital to the best-performing units within the company.

Secondly, the current market environment is ripe for accretive investments.

Marubeni Corporation indicated at the company's latest second quarter earnings call that "investment opportunities" have "started to pile up" and mentioned that "there is less risk of paying too much for the investments" as economic conditions remain challenging. MARUY's views are validated by third-party research. Market intelligence firm AlphaSense noted in a research article published on November 16, 2023, that it predicts that "small to midsize M&A deals" will be "on the rise (in 2024) as valuations reset" and will be a key M&A trend next year based on its analysis.

Thirdly, MARUY's current investment pipeline, as indicated in the chart presented below, is robust.

Marubeni Corporation's Investment Pipeline

In its Q2 FY 2024 earnings presentation, Marubeni Corporation shared that "investment projects are rigorously selected" with an eye on the "ROE target of 15%." Notably, MARUY currently anticipates spending a total of JPY720 billion on investments for FY 2023 and FY 2024 combined based on its current pipeline. This means that Marubeni Corporation is on track to meet its JPY1 trillion investment goal for the three-year period between FY 2023 and FY 2025.

Dividends And Repurchases

Boosting ROE involves the shrinking of a company's equity base via shareholder capital return initiatives, on top of expanding ROE by making accretive investments as detailed in the previous section.

At the start of the current month, Marubeni Corporation disclosed that it had spent JPY7.8 billion repurchasing the company's own shares between November 6, 2023, and November 30, 2023. The company has initiated a new JPY20 billion share buyback plan which came into effect on November 6 this year and expires on February 9 next year. It is encouraging that Marubeni Corporation has already completed 39% of the buyback plan with two months remaining till the expiry of the current share repurchase program.

Separately, the company had guided for a +6.4% growth in its dividend per share distribution from JPY78 in FY 2023 to JPY83 for FY 2024, which is based on the assumption of a 30-35% payout ratio as indicated in its second quarter results presentation. More importantly, Marubeni Corporation has committed to a progressive dividend policy, which implies that the JPY83 per share dividend will be the minimum dividend distribution for the company going forward.

In a nutshell, Marubeni Corporation has existing shareholder capital return initiatives in place to support its 15% ROE goal.

Closing Thoughts

I rate Marubeni Corporation as a Buy on the basis that the stock is in a good position to command a higher valuation as there are drivers (e.g., investments, capital return, etc.) that allow the company to achieve its mid-teens percentage ROE targets.

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