Summary
- Mitsui & Co. just raised its FY 2023 profit forecast to 1080 billion yen, breaking the trillion yen mark for the first time.
- Futures prices suggest lower income from hydrocarbons, only partially offset by stabilizing metals prices for FY 2024.
- The company's valuation metrics are about average for its peer group. Dividend yield is on the low end but growing the fastest.
LNG And Metals Provide A Stronger End To FY 2023
Mitsui & Co. (MITSY) (MITSF) just increased its profit forecast for the fiscal year ending in March 2023. Based on the 9M earnings release , the company now expects to earn ¥1080 billion, up ¥100 billion from the previous forecast. ¥80 billion of this increase is within the Energy segment due to higher prices and LNG volumes. ¥15 billion is within the Mineral and Metal Resources segment thanks to recovering iron ore and copper prices.
Mitsui is heavily exposed to iron ore production, with total equity share of 60 million tons this year. That is higher than all but 7 countries worldwide. The company also has an equity share of 214 thousand BOE/day of oil and gas production. They are also engaged in coal and copper mining.
Fiscal 2023 (which started in April 2022) has been a roller coaster ride for many commodity prices. The first quarter saw crude prices over $100 as the market worried about the Russia-Ukraine war impact on supply. Oil prices have been on a decline since June as world supply sources rebalanced, ending up at Mitsui's fiscal 4Q forecast of $78. Natural Gas prices soared in mid-summer as many European countries worried about securing supply for the coming winter. This also affected LNG prices in Asia, which are about 6-7 times that of the US Henry Hub benchmark. Since then, prices have cratered thanks to a warmer winter.
Coal followed a similar dynamic to natural gas although it stayed higher for longer, falling heavily only recently despite news of a post- Covid reopening in China.
On the metals side, iron ore was in a steady decline through November but has since been recovering with the China reopening sentiment. Copper has followed a similar path.
Most of the improvement to Mitsui's 2023 forecast comes from stronger LNG trading. Prices have not fallen off as quickly as Henry Hub, and volumes have increased at Cameron LNG , a US facility majority-owned by Sempra ( SRE ) and 1/6 owned by Mitsui.
Outlook For FY 2024
Mitsui will provide its first forecast for FY 2024 when it releases the year-end earnings in May. It is possible to develop our own profit forecast for the company by using commodity price forecasts. The drop in oil, gas, and coal prices that occurred in FY 2023 could persist through FY 2024 as the world rebalances from the supply shocks of the early Russia - Ukraine war. An upside risk to this would be a colder winter next year as well as a rapid demand increase from China due to post- Covid reopening. On the metals side, the China reopening already seems to be positively impacting iron ore and copper prices. I predict prices will be around current levels for FY 2024 with upside risk if the economic rebound in China is stronger.
Mitsui's income forecast is also subject to foreign exchange price movements. A stronger yen means lower yen profits for the company as foreign sales denominated mainly in dollars are translated back. The yen has strengthened recently as the BOJ has finally allowed longer term interest rates to fluctuate a bit more above zero. If the current level of ¥130 per USD persists through FY 2024, it would be a stronger yen than the FY 2023 average.
Mitsui includes a sensitivity chart in its earnings slides which estimates the impact of commodity price and forex changes on the company's profit. Using this, we can develop a profit forecast ahead of the company for FY 2024 using our own price set.
Looking first at commodity prices, we see that the futures traded on the CME suggest lower oil and gas prices in FY 2024. Futures are not as actively traded for coal and iron ore, so I am projecting forward recent prices for those materials. The hydrocarbons have a large negative impact on FY 2024 profit, partially offset by iron ore and copper. The total price impact is ¥87.55 billion.
Mitsui also forecasts commodity production volumes. The company expects a small increase in oil production, offset by a decrease in gas volumes resulting in a negligible impact on the Energy segment. In Minerals & Metal Resources, the company forecasts higher volumes of iron ore, coal, and copper. The net impact on Mitsui from volume changes is ¥19.38 billion.
The stronger yen results in another negative, however. A full year average exchange rate of ¥130 per USD would impact profits by ¥23.64 billion compared to FY 2023.
Putting it all together, the impact for FY 2024 from price, volume, and forex is -¥91.8 billion.
Finally, we can consider the non-commodity-based segments of Mitsui, although these segments are smaller and not as heavily dependent on a single factor like commodity prices. Machinery & Infrastructure depends heavily on the automotive market, which has recently experienced strong demand but also supply constraints. As we get further away from the pandemic, these factors should normalize. Chemicals has benefitted from fertilizer and other agricultural demand as well as the supply shock from the Ukraine war. This could also normalize in FY 2024. In the Lifestyle segment, Mitsui is increasing its ownership stake in Aim Services, a food service provider to hospitals and other institutions. This should have a positive impact on segment earnings but the contribution to the overall company is relatively small.
Considering all these impacts, I expect Mitsui will estimate a similar ~¥90 billion impact to the commodity-based segments as well as include some negative overview for a margin of safety in their initial FY 2024 profit forecast. The resulting forecast would be in the ¥950 - ¥990 billion range, below the current FY 2023 projection of ¥1080 billion.
Valuation
Mitsui's ordinary share price has increased by 6.2% since my article last quarter . That is right in the middle of the five major trading companies on price performance. Using the ¥1080 billion profit forecast, the company is also near the average of the five on P/E and P/B ratios, although at 5.51 and 0.97 respectively, the company looks cheap compared to US stocks. Following the ¥5 dividend raise for the full year, the dividend yield is tied for the lowest of the five at 3.5%. The payout ratio and dividend growth are the best of the five, however, indicating more potential for continued raises.
Capital Management
As we see on the above chart, all 5 trading companies have managed their debt responsibly in this recent period of commodity price strength, and they have similar debt/equity ratios in the 0.5 - 0.6 range.
Looking at cash flow, Mitsui has generated ¥961 billion core operating cash flow YTD which more than covered capex, buybacks, and the 1H dividend, before any asset sales. For the fourth quarter, the company is expecting another ¥239 billion operating cash flow for a FY total of ¥1200 billion. This will cover 2H dividend which will be at least ¥70 per share for a total of ¥108 billion. The remaining cash flow will also cover the additional newly authorized buyback of ¥100 billion.
Conclusion
The strengthening commodity prices that caused Mitsui to raise its profit forecast for FY 2023 cannot be counted on in 2024. Based on futures prices, I see a headwind of about ¥90 billion from commodity prices and forex. This would put Mitsui's FY 2024 profit back below the ¥1 trillion mark after hitting it in FY 2023.
The expected earnings decline from 2023 to 2024 helps explain the apparently cheap 2023 P/E of 5.5. Other trading companies are in a similar situation and Mitsui is valued at about the average of its peer group. Nevertheless, the company has the lowest dividend payout ratio and the best year-on-year dividend growth of the five trading companies. Mitsui can be bought here for the safe dividend and added to if the price falls because of short-term commodity price fluctuations.
For further details see:
Mitsui Is Now A Trillion Yen Company. Can It Stay There?