2024-01-10 08:40:12 ET
Summary
- Sony Group's partial sale of its Payment Services business might potentially result in an increase in shareholder capital return and a sooner-than-expected listing of its Financial Services unit.
- But it comes as a disappointment that Sony has reduced the number of live service games that it expects to introduce to the market by fiscal 2025.
- I continue to assign a Hold rating to Sony in view of the company's latest corporate developments.
Elevator Pitch
I rate Sony Group Corporation (SNEJF) (SONY) [6758:JP] as a Hold. Earlier I touched on how the change at the top for Sony Group's Game & Network Services, or G&NS, business could affect the company in my September 29, 2023, write-up .
My attention turns to Sony Group's reduction of its stake in its Payment Services business and the downward revision in its live service games launch guidance in this latest article.
I have a mixed opinion of Sony Group after considering the latest developments for the company, which translates into a Hold rating for the stock. I am positive on Sony Group's partial divestment of its Payment Services unit, but I view the company's decision to halve its targeted number of live service game launches in a negative light.
Divestment Of An 80% Interest In Payment Services Business
Seeking Alpha News reported in the late-December 2023 that Sony Group is selling an 80% equity interest in its payment services business to Blackstone ( BX ) for $280 million (or JPY40 billion).
In its December 22, 2023, announcement , Sony Group noted that "Sony Payment Services will become an affiliate of Sony Bank (with a 20% stake) accounted for using the equity method" following this transaction, and it also revealed that it estimates "20 billion yen ($140 million) in operating income" will be recognized in Q4 FY 2023 (YE March 31).
I take the view that this latest corporate restructuring move has a positive impact on Sony Group in both the short term and long run.
In the near term, there is potential upside to Sony Group's actual final dividend distribution for 2H FY 2023 (October 1, 2023, to March 31, 2024) as a result of a partial sale of its stake in Sony Payment Services.
Sony Group paid out a dividend per share of JPY40 in 1H FY 2023, but the company didn't indicate a specific dividend guidance for the second half of the current fiscal year or the full year. As per consensus data taken from S&P Capital IQ , the market estimates that Sony Group could pay out a full-year dividend per share of JPY82.3, which implies a similar amount of dividend distribution in 2H FY 2023 (JPY42.3) as compared to 1H FY 2023 (JPY40).
The company emphasized in the company's December 22, 2023, release that it is "currently assessing the impact of these expected gains and other factors on its consolidated financial results forecast for FY23." The JPY40 billion divestment proceeds associated with Sony Payment Services account for a meaningful 5% of Sony Group's full-year FY 2023 bottom line guidance of JPY880 billion . In my opinion, there is a good chance that Sony Group might surprise the market in a positive manner by announcing a larger-than-expected 2H FY 2023 final dividend.
Alternatively, Sony Group might choose to return more capital to its shareholders via share buybacks by utilizing the gain on sale of its 80% equity interest in Sony Payment Services. Sony Group currently has a JPY200 billion share buyback program that is effective for the May 18, 2023-May 17, 2024, time frame, and the company could potentially get more aggressive with share repurchases.
For the medium-to-long term, the introduction of a strategic investor like asset management giant Blackstone might boost the prospects of Sony Group's Financial Services business
Sony Payment Services And Sony Bank Are Part Of Sony Group's Financial Services Business Segment
At the company's 2023 Corporate Strategy Meeting , Sony Group had indicated its intention to have Sony Financial Services become a separate, publicly-listed entity in time to come. It is realistic to expect that Sony Financial Services' IPO could happen sooner than later, if the segment's businesses and investments like Sony Payment Services exceed expectations, and the segment as a whole becomes more profitable.
With the sale of an 80% equity interest in Sony Payment Services, Sony Group's Financial Services business is essentially aiming for a smaller share of a larger pie, rather than be content with a larger share of a smaller pie. In BX's media release announcing the purchase of a 80% stake in Sony Payment Services, Blackstone cited statistics suggesting that "Japan is the fourth largest electronic card payment market in the world with a market penetration of 9.1%." Sony Financial Services' remaining minority investment in Sony Payment Services could eventually yield significant gains, with Blackstone now leading Sony Payment Services' in capitalizing on the increase in the penetration of cashless payments in Japan.
Also, the profitability of Sony Group's Financial Services business is expected to improve going forward, as the company diverts capital from Sony Payment Services to other profitable and cash flow generative businesses within the Financial Services segment.
GN&S Segment's New Live Service Games Launch Target Was Reduced Significantly
Sony Group revealed at its most recent quarterly (Q2 FY 2023) earnings briefing late last year that the new live service games launch target for its G&NS business segment has been changed.
In the middle of 2022, Sony Group had set a goal of introducing 12 new live service games by FY 2025 (ended March 31, 2026). But the company is currently proposing to launch just six new live service games, or half of what it had committed to earlier. At its latest Q2 earnings call, Sony Group mentioned that "an ongoing review has indicated that some of the titles do not meet the expectations of gamers at present", which it cited as the key reason for the reduced launch target.
Bloomberg published a commentary piece on January 6, 2024, which highlighted its forecast that live service games or games as a service "will face a reckoning" in 2024 because the games in this category are "competing with one another in perpetuity" which means that "oversaturation is inevitable." In this early-January Bloomberg article, it is predicted that Sony Group's G&NS business might further reduce its target for the launch of new live service games in the future.
It is also worth referring to Sony Group's other management comments at the Q2 FY 2023 results call. Sony Group emphasized at its second quarter results briefing that it needs to "release high-quality titles to ensure that gamers love and play them for as long as possible" and stressed that the foray into live service games is a "mid- to long-term" endeavor.
It will be reasonable to infer from the company's management commentary that Sony Group is concerned that not all of its planned new live service games will be successful enough to generate recurring revenue over a long period of time that justify the substantial upfront investments. More significantly, it is highly probable that Sony Group intends to take a more gradual approach in pivoting towards live service games.
In my late September article, I had noted that Sony Group's G&NS business was facing "disruption threats associated with cloud gaming." The company's venture into the live service gaming space was initially perceived to be a positive re-rating catalyst for the stock, as the potential success of Sony Group's live service games will help to convince the market that the rise of cloud gaming isn't a big risk factor for its console gaming business. As such, the decrease in Sony Group's expected number of new live service games was disappointing.
Closing Thoughts
Recent developments associated with Sony Group's Payment Services and G&NS businesses have left me with a mixed view of the stock's prospects. Therefore, I have decided to leave my existing Hold rating for Sony unchanged.
For further details see:
Sony: Partial Divestment And Games Launch Target Draw Attention