2023-10-13 14:30:30 ET
Summary
- I have a favorable view of Hitachi's recent corporate restructuring move, its continued share buybacks, and the good performance of its key business, Lumada.
- The major catalysts that I have identified for Hitachi might come into fruition much earlier than when I anticipated, considering recent developments.
- Hitachi continues to be rated as a Buy, as I think that the company is coming closer to realizing its key re-rating catalysts.
Elevator Pitch
I retain a Buy rating for Hitachi, Ltd. ( HTHIY ) [6501:JP] stock.
In my earlier July 13, 2023, article , I identified multiple catalysts for the stock, such as "ROIC (Return On Invested Capital) improvement, a narrowing of the conglomerate discount, and a growing revenue contribution from Hitachi's key growth business, Lumada."
A review of recent developments indicates that Hitachi is making very good progress in realizing the key catalysts that I mentioned in my July write-up. As such, I see no reason to change my existing Buy rating for Hitachi.
It is relevant to highlight that Hitachi's shares are traded on the OTC market and in Japan. The company's shares listed on the Tokyo Stock Exchange boast a mean three-month daily trading value of approximately $5 million (source: S&P Capital IQ ), while the average three-month daily trading value for Hitachi's OTC shares is higher at $150 million. Interactive Brokers is one of the US stockbrokers that readers can consider if they have the intention of trading in Hitachi's Tokyo-listed shares.
ROIC Will Be Boosted By Share Repurchases
With my prior article published on July 13, I highlighted that Hitachi's target is to increase the company's ROIC from the current high-single digit percentage level to 10% or higher going forward. The return of capital to shareholders via initiatives like buybacks is one of the ways for Hitachi to generate higher ROIC.
In the early part of this month, Hitachi revealed that it has recently spent JPY19 billion on share repurchases between September 1 and October 2 this year. This brings the cumulative amount of capital to buybacks following the new share repurchase authorization granted by shareholders in April to JPY99.9 billion. This implies that Hitachi has completed its JPY100 billion share buyback plan in a much shorter amount of time than earlier expected, as the company's buyback authorization expires on March 31, 2024.
At its most recent Q1 FY 2023 (April 1, 2023, to June 30, 2023) results briefing , Hitachi guided that the company "should reach the level of JPY100 billion in terms of the buyback" by September, and the company has lived up to its promise. More importantly, a reduction in Hitachi's capital base driven by the completion of its share repurchase program is expected to drive up the company's future ROICs.
Recent Corporate Restructuring Move Will Help To Narrow Holding Company Discount
I previously mentioned in my mid-July write-up that Hitachi suffers from "a hefty holding company discount or conglomerate discount" due to "the perception that it owns a bunch of unrelated businesses with limited synergies between each other."
Hitachi can potentially narrow the conglomerate discount assigned to its shares by simplifying the company's corporate structure, and leverage the synergies between the various businesses it owns and operates. This is exactly what the company has been doing.
Earlier this week on October 11, Hitachi disclosed that it will transfer its "Healthcare Business Division to Hitachi High-Tech, a wholly owned subsidiary of Hitachi, through a company split", a transaction which is projected to be concluded in April 2024. In this announcement, the company stressed that Hitachi High-Tech and the Healthcare Business "have many things in common such as strong sales channels" and "share mutual strengths such as R&D and manufacturing capabilities."
It is realistic to assume that Hitachi is in a better position to generate higher revenue and reduce costs following the completion of the combination of its Healthcare Business and Hitachi High-Tech. It will be easier for HTHIY to capitalize on growth opportunities in the healthcare market by operating as a single entity rather than two separate companies, so this will boost Hitachi's overall healthcare-related revenues. On the other hand, there is likely to be a pretty substantial amount of duplicate costs and redundancies that can be removed with this transaction, given that both companies, Hitachi High-Tech and the Healthcare Business, have many similarities as mentioned above.
In my opinion, investors will be encouraged by Hitachi's efforts to realize synergies between its different operating companies through portfolio reshaping moves like the one mentioned in this section. This should shorten the amount of time required for the narrowing of Hitachi's holding company discount.
Lumada's Most Recent Quarterly Performance Exceeded Expectations
I specifically stressed in my July 2023 article that "the market should be willing to assign a higher valuation to Hitachi when its crown jewel (Lumada) contributes a larger percentage of HTHIY's top line." Lumada's recent results suggest that Lumada's revenue contribution is growing way faster than the market is expecting.
Revenue for Lumada rose by +30% YoY from JPY396 billion in the first quarter of fiscal 2022 to JPY513 billion for Q1 FY 2023. In contrast, Hitachi's management guidance points to expectations of Lumada's sales increasing by a relatively more modest +16% for full-year fiscal 2023.
Even if one excludes favorable foreign exchange effects, Lumada's constant-currency revenue growth for the first quarter of the current fiscal year was still a very impressive +27% as per disclosures at its Q1 FY 2023 results call.
Closing Thoughts
I think that Hitachi is coming closer to realizing some of the major catalysts that I have identified for the stock. These favorable recent developments explain why I remain bullish on Hitachi.
For further details see:
Hitachi: Positive Developments Relating To Catalyst Realization