ORXCF - ORIX Corporation: Riding On Hopes Of Economic Recovery Post Covid-19

Summary

• IX cash grew 22.6% (QoQ) to $8.2 billion, with current assets now at their all-time high of $65.3 billion.
• ORIX Corp aims to raise its dividend payout by up to 40%, with the share buyback set at JPY50 billion by the end of FY 2023.
• ORIX has made huge investments in the infrastructural business segment, which has been gradually paying off.

ORIX Corporation (IX) reported Q3 2023 revenue of $4.8 billion against consensus estimates of $4.68 billion. ORIX Corp's stock price is up 9.80% ('YTD') but has dropped 14.58% (Y/Y) as Japan continued to face core inflation concerns and Covid-19 restrictions into 2023. For the 9 months ending on December 2022, IX's income attributable to shareholders declined 43.5% (YoY) to $1.15 billion from $2.05 billion recorded in the same period in 2021. The three sectors worst hit in the Japanese company's investment portfolio were finance, maintenance leasing, and real estate.

Thesis

ORIX Corp's management hopes to profit from the reopening of businesses that were impacted by Covid-19 ahead of its Q4 2023 earnings date. The company has expanded its capital recycling strategy, especially in the operating segment, with new investments targeted in the environment/ energy and concession business. IX is enhancing its platform to maintain stable growth in the auto business and insurance despite a decrease in the banking and consumer finance profit segment.

Overview of economic performance trends

It was not a stellar year for ORIX after it was outperformed by the Nikkei 225 (NKY:IND) as well as the S&P500 index.

Near-term trades on Asian stocks rose slightly in mid-January 2023 as the Bank of Japan failed to change the yield curve of its monetary control policy. The ultra-dovish -0.1% interest rate adversely affected the Yen against the US dollar, with the S&P 500 slowing down losses to -11.02% (YoY).

Investing in ORIX Corp means an investment in a basket full of companies, infrastructural projects, and contracts from Asia, Europe, and the Americas. The company has divided its earnings into profits and asset growth. IX cash grew 22.6% (QoQ) to $8.2 billion, with current assets now at their all-time high of $65.3 billion. Total assets currently range at $110.9 billion with total debt standing at $39.655 billion as of Q3 2023. While ORIX enjoys a multinational status, it is not as big as Toyota Motor Corporation ( TM ) which has a market cap of $196.36 billion. Still, ORIX shareholders get a better dividend yield at 3.75% ('TTM') as compared to Toyota's 2.75% ('TTM') dividend yield. Apart from being in the auto industry, ORIX is Japan's

ORIX Corp recovered from a loss of JPY11.2 billion in Q4 2022 to a segment profit of JPY5.6 billion in aircraft/ ships, operation, and concession businesses in Q3 2023. These three sectors were worst hit in the year due to government restrictions that limited movement, as well as the ongoing Russia-Ukraine conflict. The Japanese government began a nationwide program aimed to support travel and boost the domestic tourism market. This program applied up to 40% in travel discounts up to December 2022 and is supposed to proceed with a 20% discount until March 2023. While this program may not be a long-lasting solution to the travel industry, it has still opened the way for local Japanese governments to offer incentives for domestic travel.

ORIX has made huge investments in the infrastructural business segment, which has been gradually paying off. In the nine months ending on December 31, 2022, total revenue rose 7% to about $15 billion from $14.3 billion realized a year earlier. Further, investment in aircraft/ ship-related management realized almost a 500% increase in profits to $129.8 million while assets rose 2% in the nine months ending on December 2022.

This uptrend resulted from leasing profits and an increase of about 80% in the occupancy rate of facility operations. The easing of the Japanese border measures means that ORIX expects growth in earnings in Q4 2023. Additionally, an influx of Chinese tourists is also expected to grow ORIX's earnings in 2023. The balance of payments in International tourism for the FY 2021 hit about JPY0.21 trillion, indicating a decline of about JPY2.5 trillion as compared to 2019. This decline denotes the tough environment caused by inbound travel restrictions by the government due to Covid-19.

New deals on the horizon and capital recycling

Q3 2022 saw ORIX linked with a move to buy out Toshiba ( TOSBF ) for about JPY300 billion ($2 billion). IX is part of a consortium of banks and financial institutions led by Japan Industrial Partners ((JIP)) that sought to buy after it put itself up for auction nearly 2 years ago. Reports indicated that banks under the JIP banner had agreed to issue loan commitment letters valued at JPY1.4 trillion, or $10.7 billion. Toshiba's revenue as of September 30, 2022, stood at $5.9 billion, representing an 8.2% (QoQ) growth rate. Toshiba is yet to decide on the buyout.

ORIX's nearly 500% aircraft management profit growth was largely attributed to an increase in net income from Avolon Holdings Ltd. ORIX acquired a 30% stake in this aircraft leasing firm back in 2018. The company's upward trend in earnings since the reopening of the economy has helped ORIX to reduce its losses in addition to earnings from the ships unit.

In its Q3 2023 earnings call, ORIX stated that it was proceeding with its capital recycling strategy that would see the company strengthen its financials into FY 2024. Firstly, ORIX stated that it had sold an 8% stake in Ormat Technologies ( ORA ) in the quarter, worth about $337.5 million. Back in 2017, ORIX acquired a 22.1% ownership stake in Ormat (or about 11.0 million shares) worth $627 million from the geothermal energy company. By selling an 8% stake, ORIX had offloaded more than 3.75 million shares gaining almost half the price it bought its initial stake. Despite the sale, Ormat shares have gained 31.78% (Y/Y) indicating that it is a vital long-term geothermal play for the company.

Ormat's success also indicated a successful investment in the environment and energy sector for ORIX. The company's segment profits for renewable energy, solar panels revenues, and retailing of electric power/ battery storage and waste management rose by 86% (to $261 million) in the 9 months ending on December 31, 2022. Revenue from renewable sources of energy is likely to increase, partly due to the ongoing war in Ukraine.

Shareholder returns

After approving its JPY50 million share buyback plan in May 2022, ORIX stated that it completed the acquisition of about 23.43 million shares (2%) of the outstanding shares as of Q3 2023. The company announced that it was planning to increase its dividend by the end of FY 2023. ORIX spends about a third of its net income on paying dividends, with the other third on CapEx, retained earnings, and share buybacks. An increase in this amount will mean a higher payout to shareholders. As of Q3 2023, IX's net income had ticked up 64.9% (QoQ) to $682.7 million. The company hopes that its full-year net income will reach JPY250 billion, or about $1.9 billion. Achieving this amount will mean ORIX will raise its dividend payout by up to 40% with the share buyback set at JPY50 billion.

Risks to consider

ORIX Corp's gross profit has declined 36.5% (YoY) to $1.3 billion from a high of $2.1 billion recorded as of December 31, 2021. The company has been seeing an increase in the cost of revenues with accumulated shareholder losses now at $22.97 billion. Q3 2023 also saw the corporate finance services and maintenance leasing business realize a net loss of 9% in the nine months ending on December 31, 2022. ORIX has been offloading a significant number of businesses, especially in Japan such as Yayoi, a software development company that has led to a decline in profits. ORIX is yet to recover from this divestiture, as it recorded further drops in services income.

ORIX Europe, USA, and Australia are yet to deliver significant profits and made losses in the 9 months ending on December 31, 2022. ORIX Corp's main profit segment came from Japan and Asia as a whole. The company is yet to see an improvement in earnings, especially from the Americas, which recorded a 51% loss to $252.5 million from a high of $515.5 million recorded in the same period in 2021.

Bottom line

ORIX Corp is yet to report full-year earnings for FY 2023 with the company hoping to realize JPY250 million in net income. The company has been making headway in capital recycling by using funds to invest in profit-making entities around the world while divesting in other businesses to raise capital for investments. ORIX Corp's share price is trending just 14.5% below the 52-week high of $104.62. In my opinion, IX has a possible upside potential of about 50% by May 2023 when it releases its FY 2023 earnings results. I will be hoping it attains its revenue and net income guidance, as that will mean a higher dividend payout to shareholders as well as a completion of the share buyback plan. For these reasons, I propose a buy rating of the stock.

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