IX - ORIX: Spotlight On Share Repurchases And Asset Monetization

2023-09-08 03:55:40 ET

Summary

• ORIX Corporation has already completed more than half of its current fiscal 2024 JPY50 billion share repurchase program by end-Aug.
• IX plans to divest some of its domestic logistics properties and overseas renewable energy plants in this fiscal year.
• I leave my Buy rating for ORIX Corporation unchanged, as IX could trade at a higher valuation multiple with accretive capital allocation moves such as asset divestments and share repurchases.

Elevator Pitch

I still have a Buy rating assigned to ORIX Corporation (IX) [8591:JP] shares. ORIX Corporation's valuations are still appealing, and there is room for further share price upside as the company executes on accretive capital allocation initiatives like buybacks and asset disposals.

Stock Price Performance And Valuations

I have previously written about the "multiple catalysts" in place to re-rate ORIX Corporation's shares with my prior update published on September 2, 2022. Following the publication of my write-up, IX's stock price has gone up by +19.4% (source: Seeking Alpha price data). In comparison, the S&P 500 rose by +11.7% in the same time period.

Notwithstanding IX's share price outperformance on an absolute and a relative basis in the past 12 months, ORIX Corporation's shares are still attractively valued.

IX is now trading at 10.6 times consensus forward next twelve months' EV/EBITDA, and this is significantly below the stock's 5-year average EV/EBITDA multiple of 15.3 times as per S&P Capital IQ's valuation data. Also, the market currently values ORIX Corporation at below book value, or a trailing P/B ratio of 0.92 times.

As indicated in its Q1 FY 2024 (YE March 31) results presentation slides , IX has a target of expanding the company's ROE from 8.5% in FY 2023 to 10.4% for FY 2025. If ORIX Corporation does manage to improve its ROE as per its financial goals, this should serve as the driver for a re-rating of IX's valuation multiples.

In the subsequent sections of this article, I highlight how ORIX Corporation can rely on value-accretive capital allocation to raise its ROE going forward.

Share Buybacks Are Value Accretive

ORIX Corporation has been allocating a meaningful amount of capital to share repurchases in recent years, and IX is expected to be doing the same for the foreseeable future.

The amount of monies that ORIX Corporation spent on share buybacks from JPY45.7 billion for FY 2020 to JPY54.3 billion in FY 2021, before stabilizing at JPY50.0 billion for both FY 2022 and FY 2023.

For the new fiscal year or FY 2024 (April 1, 2023, to March 31, 2024), ORIX Corporation has a new JPY50.0 billion share repurchase plan in place. At the Q1 FY 2024 results call on August 6 this year, the company revealed that it had already spent JPY17.8 billion buying back its own shares between May and July 2023. On September 5, IX issued a 6-K filing disclosing that it repurchased an additional 3 million of the company's shares for a total consideration of JPY7.9 billion for the month of August. In other words, ORIX Corporation has completed close to 60% of its JPY50 billion share buyback program as of August 31, 2023.

Even though IX has yet to commit to a specific amount of share repurchases for FY 2025, ORIX Corporation emphasized in its recent first quarter earnings presentation slides that share repurchases will be "carried out opportunistically" in the next fiscal year. This means that ORIX Corporation is very likely to continue with share buybacks in FY 2025 as long as its shares are at a reasonable valuation.

I have already highlighted in the previous section that ORIX Corporation's stock is currently valued by the market at below book value and a hefty discount to its five-year mean EV/EBITDA metric. This suggests that the company's recent share buybacks should have been value accretive. Furthermore, IX's ROE will also be boosted by a smaller equity base driven by its share repurchases.

Realizing Investment Gains With Asset Sales

Good capital allocation isn't just about returning excess capital to shareholders. A company which wishes to allocate capital wisely also needs to get the timing of asset sales right.

ORIX Corporation has a pretty good track record of realizing the value of the company's investments. In the past five years between FY 2019 and FY 2023, IX has achieved average annual investment gains of approximately JPY107 billion, which represent roughly a quarter of its headline earnings as indicated in its Q1 FY 2024 presentation slides.

IX noted at its first quarter earnings briefing that "yen weakness and lower interest rates in Japan have encouraged overseas investors to increase investment in Japan." ORIX Corporation plans to take advantage of investors' strong demand for Japanese assets by monetizing some of its domestic properties in the current year. Specifically, IX has five logistics facilities located in Japan that are available for sale.

Outside of its home market Japan, ORIX Corporation intends to divest a portion of its renewable power generation facilities in the near future. In its recent first quarter results presentation, IX indicated that "valuations for renewable energy generation plants remain high." As such, it is apparent that ORIX Corporation understands how to realize the maximum value of its assets and investments by selling at the time when demand is robust.

ORIX Corporation's investment gains and divestment proceeds can be used to fund both shareholder capital return and new investments. In the preceding section, I detailed how IX is executing on its current JPY50 billion share buyback plan. With respect to new investments, ORIX Corporation has the potential to increase its ROE by optimizing its portfolio mix to have a larger proportion of higher-yielding assets.

Closing Thoughts

IX has set a target to improve its ROE by +190 basis points between FY 2023 and FY 2025. In my opinion, ORIX Corporation's ROE improvement goal is achievable, taking into account the company's asset monetization and shareholder capital return efforts. I continue to rate ORIX Corporation as a Buy, as its shares still have valuation re-rating potential.

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