2023-11-24 09:59:49 ET
Summary
- Mitsubishi Corporation's financial report shows a reduction in revenue and net profit compared to the previous year, but are guiding on improvements in SH.
- The company continues to focus on shareholder friendliness, increasing dividends and conducting share buybacks.
- The business prospects for Mitsubishi Corporation remain positive, particularly in LNG production and mineral resources.
Investment thesis
In June this year, we initiated coverage of Japan's largest trading house Mitsubishi Corporation (MSBHF) with a Buy stance. As the headline of that article alluded to, we believed having Buffett and Berkshire Hathaway (BRK.A)(BRK.B) investing in it, was probably one of the best validations you can get.
Nearly half a year has gone by, and the status so far is a positive total return of nearly 12%. When we look at the share price over one year it's been fantastic with an improvement of 48%.
MSBHF has just published its latest financial report, so we would like to examine it and further explore its future business prospects to see where our stance is now.
Latest Financial Results
MSBHF's first half year ended 30th September 2023. Based on IFRS accounting, the revenue for FH 2023 was down to ¥9.56 trillion from ¥10.72 in 2022.
Their consolidated net profit came in at ¥466 billion, which was a reduction of 38% Y-o-Y. This translates to an EPS of ¥328 against ¥488 a year ago. 2022 was their highest net profit on record so it is not that this year's profit was bad it was just abnormally good last year.
In many ways, this trading house is a conglomerate with interests in many different sectors, and in a way functions somewhat like Berkshire Hathaway. MSBHF owns 160 companies .
It is useful to see which segments or business line makes money and which does not.
Management has guided for an EPS of ¥ 630 for full-year results which ends 31 March 2024. They have also guided for an increase of ¥10 in the total dividend for the year, bumping it up to ¥210. In addition to the dividend, MSBHF has also bought back its own shares to the tune of ¥100 billion this year.
Their target payout ratio, including share buybacks, is around 40%.
In our previous article, we applauded their improvement in shareholder friendliness. This seems to continue, which is a good thing.
On top of this, they are not neglecting investing in their business. Many of their industries, such as infrastructure and power generation are capital intensive and facing huge future investments to align with environmental goals set.
We notice that despite receiving cash from divestments of ¥464 billion in the FH, they also invested cash of ¥434 billion in new plants and equipment. The underlying free cash from operation was ¥608 billion.
Their balance sheet is quite good. As of 30th of September 2023, they had gross interest-bearing liabilities, excluding lease liabilities, of ¥4,996 billion. Tangible assets were ¥21,650 billion, which includes cash and time deposits of ¥1,591 billion.
Valuation
The price is what you pay and the value is what you get. Obviously, Buffett bought Mitsubishi Corporation at a much lower price than what it is today.
Is it still good value now after the run-up in price?
One way to look at how effective management utilizes the equity they hold is to look at a company's ROE. At least that is what the most well-known MSBHF shareholder Warren Buffet likes to look at. Anything that is a double-digit return on equity is in our opinion good. MSBHF expects their ROE for the full FY 2023 to be 11.2%
The P/E might not have as much relevance as it used to have with so many accounting adjustments for mark-to-market changes and companies' ability to make provisions for future liabilities or losses. However, we still think it is one of several benchmarks worth having a look at. It matters to us whether a company has a P/E of just 5 or as high as 50.
The price of one ordinary share on the Tokyo stock exchange is ¥7,041 and management has guided that EPS this FY is going to be about ¥950 which leaves us with a very reasonable P/E of just 7.4
Have they managed to grow EPS?
With the exception of the two years of outlying numbers, 2016 and 2020, we can see that they have grown EPS quite considerably over the last 10 years.
We normally like to look at the share price in relation to its book value too. SA has a Price/Book of 1.1 which is reasonable. Book values of properties and plants are most likely much lower than the market value, should they be disposed of. These are depreciated over a period of up to 60 years.
Business prospects
LNG production and sale is one of the cornerstones of MSBHF's business. Most of their production comes from partnerships with other large energy companies such as Shell ( SHEL ), BP ( BP ), Chevron ( CVX ), and PETRONAS (PNAGF).
Presently their part of the production is 12.19 million tons per year. This is set to increase by 2.10 million tons from Canada LNG which is scheduled to start exporting in 2025.
The other commodity which does have a bright future is mineral resources. Metallurgical coal is still going to be needed, as long as steel is made through blast furnaces. Their mine in Australia, which is 50% owned by MSBBHF and the balance is owned by BHP (BHP) is the world's largest mine for metallurgical coal. It is well-positioned to sell to India and China. Steelmaking is slowly turning to new methods where coal is not going to be required, but this will take several decades to be rolled out globally.
MSBHF also owns 20.4% of the Chilean copper producer Anglo American Sur. With so much electrification going on, the demand for copper should be brisk going forward.
Their automotive company is actually delivering good profit in a competitive landscape. We are unsure if they can continue to do so as it seems margins are getting thinner with competition now also coming from Chinese EVs.
Risks
Currency risk would be our main concern. With a global footprint, they are dealing with several currencies. On top of this is the main issue of the USD against the Yen. We did highlight this risk more in detail in our last article on BlackRock's iShares JPX-Nikkei 400 ETF ( JPXN ).
In terms of foreign exchange sensitivity for the USD/Yen, for every 1¥ change relative to the USD, it will have approximately ¥5 billion effect on the profit for the year.
For Japan, as a country, there are plenty of risks to deal with. A declining and aging population is always going to be a problem. Fewer people that work and pay taxes and more older people that need care. However, for MSHBH, I do not think this is a risk in itself as they are manufacturing and selling their products globally.
Conclusion
In our previous analysis, we believed that Mitsubishi Corporation's strong fundamentals combined with their shareholder-friendly return of capital called for an optimistic view of the company's future. This was also backed up by our bullish outlook on commodities which would be a catalyst for more upside in the share price.
On the topic of the shares, effective the 1st of January 2024 MSBHF is doing a 3 for 1 ordinary common share split to increase liquidity and expand the number of shareholders.
There is no change to our stance. We maintain a Buy on the company.
For further details see:
Mitsubishi Corp: Still Good Value Now After The Run-Up In Price?