2023-12-27 10:45:44 ET
Summary
- GlobalLogic, a digital transformation services business bought out by Hitachi in 2021, has recently proposed two new acquisitions.
- Hitachi Power Solutions' carbon neutrality business aims to generate at least JPY30 billion in revenue by FY 2027 by taking advantage of opportunities related to decarbonization.
- I retain my Buy rating for HTHIY after reviewing the recent updates for the company's digital transformation and carbon neutrality businesses.
Elevator Pitch
My investment rating for Hitachi, Ltd. ( HTHIY ) (6501:JP) is a Buy. I noted in my prior update for Hitachi written on October 13, 2023 that the company has achieved "good progress in realizing the key catalysts" such as shareholder capital return and portfolio restructuring.
In the current article, I highlight my positive opinion of GlobalLogic's (Hitachi's digital transformation business) latest acquisitions and the move to consolidate the company's carbon neutrality-related businesses under a single unit, Hitachi Power Solutions. Taking into account these favorable business updates, I choose to maintain a Buy rating for Hitachi.
Investors can trade in Hitachi's shares on the Tokyo Stock Exchange and the OTC (Over-The-Counter) market. The 10-day average daily trading values for the company's OTC shares and Japan-listed shares were $2.5 million and $150 million, respectively, based on S&P Capital IQ data. There are US brokers like Interactive Brokers that allow their clients to buy and sell Japan-listed shares.
Digital Transformation Business Arm Goes On Acquisition Spree
In my earlier September 22, 2022 write-up for HTHIY, I mentioned that "GlobalLogic, a new business bought by Hitachi in 2021, is well-positioned to meet growing demand for digital transformation services." In recent weeks, GlobalLogic has proposed two key M&A deals.
On December 12, GlobalLogic revealed that it planned to buy out "Katzion, a Sydney, Australia-based engineering firm specializing in applications for the automotive industry." This transaction will enable GlobalLogic to establish a presence in new markets like Spain and Australia, and enter new automotive sub-segments such as rental vehicles and lightweight mobility devices. Subsequent to that, GlobalLogic disclosed on December 19 that it has signed a deal to take over "Mobiveil, a specialized embedded engineering services firm" to strengthen its "capabilities in Embedded Software." German technology company Siemens ( SIEGY ) ( SMAWF ) defines embedded software as "specialized programming within non-PC devices."
Hitachi's most recent Q2 FY 2023 (July 1, 2023 to September 30, 2023) financial performance was reasonably good with GlobalLogic being a key contributing factor.
Hitachi's top line and EBITDA grew by +13.6% QoQ and +27.2% QoQ to JPY2,638 billion and JPY321 billion, respectively for the second quarter of fiscal 2023. The company achieved revenue and EBITDA beats of +8.3% and +13.8% (source: S&P Capital IQ ), respectively in Q2 FY 2023.
In the most recent quarter, GlobalLogic's revenue expanded by +21% YoY in JPY terms (or +16% YoY in USD terms) and its operating margin was high at around 20% as indicated in Hitachi's Q2 FY 2023 results presentation . Hitachi highlighted on its second-quarter earnings call that GlobalLogic bought three companies in "Romania, Latin America, Ireland" to "increase staff" such as "digital engineers", and these deals have resulted in a "revenue increase." GlobalLogic's Q2 FY 2023 organic top-line growth would have been a relatively lower +6% YoY in USD terms excluding the impact of acquisitions.
In other words, GlobalLogic has done well in leveraging on inorganic growth drivers to expand its top line and acquire the necessary talent to support future growth. As such, the two acquisitions that were recently announced, Katzion and Mobiveil, bode well for GlobalLogic's growth prospects.
GlobalLogic's Growth Strategy
As indicated in the chart presented above, Hitachi's goal is to grow GlobalLogic's revenue by a CAGR of +29% for the FY 2021 to FY 2024 time period. GlobalLogic's top-line expansion ambitions are expected to be supported by a +14% CAGR in staff strength during the same time frame. In conclusion, GlobalLogic's recent acquisition spree puts it in a good position to add to its ranks and realize its intermediate-term revenue target.
Latest Corporate Restructuring Move To Capitalize On Decarbonization Opportunities
Hitachi issued a press release on December 13, announcing that it plans to "transfer its Carbon Neutral Development Division under the Energy Business Division, which is responsible for energy and facility management service business and distributed energy resources solutions business, by way of a company split to Hitachi Power Solutions Co., Ltd." This restructuring move is projected to be completed on April 1, 2024.
The company's intention is to consolidate its operations associated with carbon neutrality under a single business entity, Hitachi Power Solutions, to take advantage of growth opportunities in the area of decarbonization. In specific terms, Hitachi Power Solutions' carbon neutrality business is targeting to generate a top line of at least JPY20 billion for FY 2024 and sales in excess of JPY30 billion in FY 2027 as indicated in its December 13, 2023 media release.
HTHIY stressed at its earlier 2023 Investor Day (transcript sourced from S&P Capital IQ ) that there are significant growth opportunities relating to "helping businesses and industries decarbonize using Hitachi's know-how", which the company referred to as a "carbon neutral as a service business."
An Overview Of Hitachi Power Solutions' Carbon Neutral As A Service Business
An October 21, 2022 McKinsey research report outlined the firm's forecasts that as much as "$9 trillion to $12 trillion in sustainability investment opportunities" could potentially "emerge by 2030." Taking into consideration this huge growth potential of the green energy transition market, the expectations of Hitachi Power Solutions' carbon neutrality business revenue expanding at a +15% CAGR from JPY20 billion in FY 2024 to JPY30 billion for FY 2027 appear to be pretty reasonable.
Concluding Thoughts
Hitachi is now valued by the market at an undemanding consensus forward the next twelve months price-to-revenue multiple of 1.1 times (source: S&P Capital IQ ). As a comparison, the S&P 500's current price-to-sales ratio is above 2.5 times . I believe that Hitachi should be able to command a higher multiple closer to the broader market in time to come, as the company returns more capital to shareholders, restructures its portfolio to enhance investment returns, and capitalizes on growth opportunities for specific businesses.
For further details see:
Hitachi: Acquisitions And Carbon Neutrality Business Draw Attention