Brief Equities Bottom-Up: SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook and more

In this briefing:

1. SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook
2. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback
3. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town
4. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target
5. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

1. SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook

SNC’s 4Q18 net profit dropped 39%YoY to Bt72m, lowest in past five quarters.  

• The drop in sales to Bt1.288m (-19%YoY) and the rise in SG&A to sales from 6.6% in 4Q17 to 9.6% are major contributors to the drop in earnings.
• Overall, FY18 net profit was Bt431m (+6%YoY) despite 14% decrease in sales. The strong improvement in its 2018 earnings was due mainly to high restructuring costs in 2017.
• We maintain neutral view toward its 2019-20 outlook due to slow recovery in overall industry.

We cut our target price by 17% to Bt14 (9.6xPE’19E) and downgrade from “BUY” to “HOLD” for gloomy outlook. Despite limit upside, current share price is still cheap compared to historical trading and offer an attractive dividend yield (6.5% in 2019-20E).

2. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback

• Sony’s revenue for the quarter fell by 10.1% YoY to JPY2,401.8bn while company’s OP saw a 7.5% YoY growth in 3QFY03/19. 
• Sony downgraded its FY03/19 revenue guidance following the third quarter’s earnings results. The company expects to make revenue worth JPY8,500bn for FY03/19, a 2.3% decrease from the October forecast. Sony’s OP forecast for the year still remains at JPY870.0bn.
• Following the 3QFY03/19 earnings release, the company announced that it would buyback JPY100bn worth of its own stock starting Tuesday and lasting until the 22nd of March. 
• As per consensus expectations, Sony is currently trading at a FY1 PE multiple of 7.6x, significantly lower than its historical median of 19.7x.

3. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town

With the huge investment that has been going into e-commerce in Indonesia, especially in the consumer space, there are doomsayers out there crying out that the end is nigh for traditional offline retail as we know it.

Anyone who has actually visited popular destination Jakarta malls such as Grand Indonesia or Kota Kassablanca with their eyes open would almost certainly take a different view. 

A visit to Mitra Adiperkasa (MAPI IJ) management in Jakarta last week confirmed that middle-class retail therapy in Indonesia is alive and well and the company is well positioned to take advantage.  

Mitra Adiperkasa (MAPI IJ) finished 2019 with +8% Same Store Sales Growth (SSSG), with a particularly strong performance from its Sports Station Stores within Ramayana Lestari Sentosa (RALS IJ) stores. 

The company continues to expand its footprint in Indonesia, with plans to increase its floor area by 60,000 sqm in 2019 and a focus on MAP Active, Fashion, and Starbucks. 

MAP continues to take an omnichannel approach to sales, working with all the major online marketplaces and selling through its own Mapemall.com. Online sales only account for around 1% of total sales currently. 

Mitra Adiperkasa (MAPI IJ) remains a key proxy for middle-class consumption in Indonesia, with an increasingly broad spectrum of exposure through alliances with other retailers such as Ramayana Lestari Sentosa (RALS IJ) and Pt Matahari Department Store (LPPF IJ), as well as through its Starbucks expansion. After a few years of restructuring, the company is now harvesting on its transformation, with its specialty business now growing at a faster pace, its department stores in much better shape, and Starbucks enjoying better scale benefits. The company’s margins have improved, it has a stronger balance sheet and more efficient working capital management. According to Capital IQ, the company is trading on 19.6x FY19E PER and 16.5x FY20E PER, with forecast EPS growth of +14.0% and +18.2% for FY19E and FY20E respectively, which continues to look attractive in valuation terms. 

4. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target

Meiji Holdings (2269 JP) recorded revenue growth of 4.1% in 3QFY2019. The food segment which produces yoghurt, drinking milk, cheese, ice cream, chocolate, nutritional products and sports nutrients came short of the expectations as it recorded a 1.1% drop in revenue. The pharmaceutical segment grew by 35.9% during the quarter allowing Meiji to maintain overall revenue growth in line with FY2019E guidance.

In contrast, EBIT turned out better than expected as it grew 32.6% in 3QFY2019. Both the food and pharmaceutical segments reported significant margin gains, thus the overall EBIT margin of Meiji improved by 227bps cf. 3Q2018.

5. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

Just a day after a pledge from CEO Maekawa to stop tweeting sent ZOZO Inc (3092 JP)‘s stock up 8% intraday, the Nikkei reported that United Arrows (7606 JP) would be parting ways with Zozotown and bringing their e-commerce business in-house from October. This comes just days after United Arrows affirmed their desire to continue working with Zozo casting doubt on the positive noises coming from Zozo itself.

As we have pointed out previously, this is the big risk for Zozo and with arguably the company that granted Zozo credibility when it was a startup leaving, a dark cloud has settled over the company’s mid-term future.