2023-03-05 03:02:58 ET
Summary
- Mitsubishi Corp.’s business lines have been surprisingly resilient in the face of a global economic slowdown.
- With the China reopening tailwind set to boost commodity prices in the coming months, more guidance hikes could be on the horizon.
- The stock still trades at a discount to book despite offering a healthy capital return with scope for more upside.
With the major Japanese trading houses all unveiling enhanced capital return policies following their latest quarterly results, the key to outperformance lies in identifying the stock with the brightest future earnings path and, by extension, scope for further shareholder returns. In these regards, Mitsubishi Corp. ( OTCPK:MSBHF ) stands out. Despite the cautious guidance and updated shareholder return policy, the fwd dividend payout ratio remains one of the lowest in the industry, leaving ample room for further capital return upside relative to the current ~4% fwd dividend yield (post-hike). Alongside the strong FCF conversion and low-teens % fwd FCF yield, Mitsubishi screens attractively against its sector peers that have adopted a similarly progressive capital return policy. In the meantime, all eyes will be on the new mid-term plan, as well as management’s execution of its growth model and ROE improvement targets.
Resilience in the Resource and Non-Resource Businesses
Mitsubishi Corp is heading into the fiscal year-end on a strong note, with a record cumulative net profit of JPY956bn (+48% YoY) over the first nine months. The key surprise in Q3 was the strong trading performance in the natural gas business, along with the resilient coking coal volumes, defying concerns about the outlook for commodities heading into a global macro slowdown. This was offset, though, by lower gains on the disposal of power solutions assets, driving an in-line overall profit result.
Still, the overall resilience will come as a relief to investors given the declining prices for key commodities like iron ore and crude in H2 amid slower growth in China (pre-reopening). Also worth noting is the earnings strength in the non-resource businesses, as well as the step up in capital returns – a welcome departure from corporate Japan’s history of low payouts. Concerns about the valuation impact of rate hikes by global central banks and monetary tightening have also proven to be overblown, as Mitsubishi and the other Japanese trading companies have seen their stock prices hold up well relative to the broader Japanese market.
Fundamental Strength Supports Guidance Upside
Across the major trading houses, any worries about slowing earnings momentum at the non-resource operations proved unfounded in the latest quarter. Even cyclical non-resource businesses like automotive and chemical solutions showed solid results. So it came as no surprise that full-year profit guidance was hiked across the board - even after accounting for a healthy buffer against unforeseen headwinds. Mitsubishi stands out here as potentially offering the highest upside vs. guidance, given it has been more conservative with its profit guidance despite exposure to similar P&L drivers. For context, Mitsubishi’s full-year net profit guidance was only just raised to JPY1,150bn or +23% YoY (vs. JPY1,030bn prior), while excluding pricing factors, full-year net profit is guided closer to JPY730bn (vs. JPY650bn prior).
Yet, business conditions are also improving on the resource side. Prices for iron ore and other key metals have risen ahead of a post-reopening demand recovery in China. At the same time, coal has also received a boost from China easing import restrictions on Australian-produced coal (note Mitsubishi has a sizable Australian metallurgical coal presence). This needs to be balanced, however, against the prospect of an economic slowdown globally as monetary policy remains tight. The FX implication of the USD depreciating alongside a potential pause in rate hikes is worth considering as well – as commodity transactions are typically USD-denominated, a weaker dollar presents a tailwind for commodity prices.
Capital Returns Hiked; Scope for More Upside
Mitsubishi Corp has been ahead of its peers on the shareholder return front, announcing a proactive stance to returning more excess cash via dividends and buybacks alongside its recent quarterly results. To recap, the company will be executing additional buybacks of up to JPY100bn (up to 33m shares or ~2% of shares outstanding) in addition to the JPY70bn buyback currently in place. Also positive is the dividend hike for the year – per management’s annual projection, the dividend per share is guided to reach JPY180/share (up from JPY155/share prior).
In effect, this implies an equivalent yield of ~4% on a relatively low payout, which screens very favorably relative to its sector peers in terms of the upside potential going forward. With the prospect of a China-led recovery in commodity prices, Mitsubishi should also have ample scope for more buybacks as earnings momentum picks up through the upcoming fiscal year.
All Eyes on the Shareholder Return Upside
Investors have likely priced in the enhanced shareholder return policies across the major Japanese trading houses post-results, but given the elevated fwd yield for Mitsubishi Corp, the market is likely still underestimating the scope for capital return upside. A key reason for the below-par valuation might be management’s relatively cautious guidance updates, as well as the concerns about the commodities decline in H2. Yet, the backdrop for the resources business is improving on the back of the post-COVID reopening in China, while the resilient non-resource businesses should more than adequately support a step up in capital returns. All in all, in a base case scenario with no material changes to the mid-term plan and successful execution of the planned ROE improvements, the current >10% book value discount seems unwarranted and should narrow over time. With investors also getting paid an fwd dividend yield of ~4% and a healthy buyback to wait, the risk/reward seems favorable.
For further details see:
Mitsubishi Corp.: All Eyes On The Shareholder Return Upside