2023-08-05 07:55:03 ET
Summary
- Hitachi has businesses with secular tailwinds that dominate its mix.
- High margin businesses that were expected to be underperformers are overperforming despite headwinds from geographies like China.
- The multiple is pretty low by international standards considering secular growth prospects, but Japan still has cheaper ideas than this.
Hitachi ( OTCPK:HTHIY )( OTCPK:HTHIF ) is performing pretty well in some segments that we expected to be particularly problematic. In particular there were worries around electronic businesses that face China, which saw order declines a couple of quarters ago. Tech is decelerating, but the worst of it is in lower margin segments which is decent for mix. Otherwise, there have been some disposals of more volatile businesses which improves the earnings profile of the business. Still, the business is performing well, and continued growth in tech and the electrification facing segments should help delivery a pretty compelling multiple on FY 2023 results. Still, we think that there is more guaranteed earnings growth in Japanese markets for much lower prices and would opt for those.
Key Segments in Q1 2023
Let's start with their highest margin segment of all . Measurement and analysis faced some major headwinds in terms of orders some quarters ago. This is partially due to a semiconductor slowdown where there is a lot of exposure in this segment. Moreover, the chip ban, in which Japan is complicit, likely has affected how much interest there is in semiconductor equipment from Japanese markets. Orders have actually been a bit more solid lately, but it is still surprising that delivery and revenue has been such that revenues are almost flat YoY . EBITA declined meaningfully due to increased development costs.
Building systems is another big market, including products like elevators. China was a big market here, and despite the pretty meaningful economic difficulties in that market, EBITA is actually pretty resilient declining only a little more than 10% YoY. Revenues are basically flat YoY. We expected more pressure than this, and forecasts do assume some more incremental pressure than we've seen so far, but margins are expected to improve despite further forecast slowdowns in revenue.
The digital businesses aren't all high growth, but GlobalLogic, a relatively new acquisition, and Lumada are going very strong, especially Lumada as it helps domestic digitalisation. Forecasts for sales growth are actually signaling a deceleration in these revenues. We think these may be outdated. GlobalLogic is an important contributor to the digital EBITA, and with the appearance of resilience in the US economy, hopefully spelling a soft landing, GlobalLogic may surprise to the upside.
Finally, there's Hitachi Energy which is half of the green energy and mobility segment at Hitachi - more than half in terms of EBITA. Unsurprisingly the momentum in the green push and electrification in particular means excellent results here. Forecasts are also pretty strong, even getting revised upwards as of the Q1 2023.
Bottom Line
Quite a few businesses have been disposed of. Hitachi metals and Hitachi Construction Machinery have both been sold off and these were some of the most cyclical businesses. What that means is that more than half of Hitachi businesses now have secular tailwinds and aren't really cyclical. Only the connective industries segment as it's called now, with building systems and the measurement and analysis businesses inside, are more likely to experience cyclical pressures, especially with regards to an ailing China whose promised rebound is not materialising well.
The implied multiple is not far off from 20x PE given forecasts. While there is a lot of secular force and general toughing in cyclical businesses that helps results be predictable and resilient, there are ideas on the Japanese market that provide similar growth prospects at much smaller valuations. Still, there is value in being in the large-cap space, and Hitachi is by no means expensive when comparing its multiple to renewable plays and others on international markets.
For further details see:
Hitachi: Overperforming Given Lack Of Chinese Rebound, Chip Bans