Brief Equities Bottom-Up: Sony: Mispriced, Misunderstood, or Both? and more

In this briefing:

1. Sony: Mispriced, Misunderstood, or Both?
2. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets
3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

1. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

2. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets

Carnarvon Petroleum (CVN AU) has announced a A$50mm equity raise to fund the appraisal of its key Dorado discovery this year and a further exploration well in the area. We discuss why we see Carnarvon’s assets as attractive.

3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly.  Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504.  3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments.  On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs.  Hardly a ‘glittering’ performance.

Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks.  Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks.  TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3.  Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice.  Caveat emptor (may the buyer beware) !