Brief Equities Bottom-Up: Sumco Reports Solid Growth in Revenue and Operating Profit; Stock Is Still Trading at a Discount and more

In this briefing:

1. Sumco Reports Solid Growth in Revenue and Operating Profit; Stock Is Still Trading at a Discount
2. MODEC: 17% Price Jump as Results Beat, Guidance Is Lowballed
3. Pan Pacific International: UNY Acquisition the Bright Spot as SSS and Inbound Decelerate
4. Nintendo Downgrades Switch Unit Sales Forecast for FY03/19 Despite Strong 3Q Financial Performance
5. Kao Corporation, 4QFY2018 Results Falls Short of Guidance

1. Sumco Reports Solid Growth in Revenue and Operating Profit; Stock Is Still Trading at a Discount

Sumco (3436 JP) reported its 4QFY12/18 and Full-year FY12/18 results yesterday (5th February). The company reported double-digit growth in revenue and operating profit for 4QFY12/18 driven by strong demand for semiconductor silicon wafers across all sizes alongside a favourable trend in wafer prices. Revenue grew 17.7% YoY in the 4^th quarter, in spite of missing its own top-line estimate by 1.7% and falling a touch below consensus and our estimates. Operating profit increased 57.1% YoY to JPY20.9bn, yet again falling below guidance, consensus and our estimates. The strong growth in operating profit resulted in a 640-bps expansion in the operating profit margin to 25.3% compared to the 18.9% reported in 4QFY12/17.

2. MODEC: 17% Price Jump as Results Beat, Guidance Is Lowballed

Modec Inc (6269 JP) reported strong 2018 results as operations for the year went smoothly and gross margin recovered to double digits in the fourth quarter with the company also releasing its contingency reserves resulting in a large uptick in SPC related earnings below the operating line.

Like last year however, guidance disappointed as the company released what we consider to be lowball estimates. Nevertheless, the stock reacted positively as the strong results offset some of the recent negativity from the large fall in crude prices. We examine the degree of conservatism we see in guidance below.

3. Pan Pacific International: UNY Acquisition the Bright Spot as SSS and Inbound Decelerate

Newly and somewhat boringly renamed  Pan Pacific International Holdings (7532 JP; PPI) (formerly the much more evocative Don Quijote or Donki) announced results yesterday after the close, seeing 11% YoY sales growth for the first half and 14% YoY current profit growth. With the inclusion of the expected contribution from a consolidated Uny Holdings, the company also boosted its FY outlook by 46% at the revenue line and 32% at the NP line.

Results at the 6 converted Uny stores continue to trend well and the company announced its intention to convert a further 19 stores by the end of the calendar year. Familymart Uny Holdings (8028 JP) had been projecting about ¥25bn in OP for Uny and its subsidiary UCS, which combined with PPI’s previous forecast for FY06/19 of ¥53bn would sum to about ¥78bn in OP, in line with consensus for PPI’s FY06/20 OP. Given the store conversions, growth overseas and some modest growth domestically for the mainline Donki stores, the prospects for a significant beat of consensus next year seem good.

4. Nintendo Downgrades Switch Unit Sales Forecast for FY03/19 Despite Strong 3Q Financial Performance

• Nintendo recorded strong revenue and OP performance in 3QFY03/19. Revenue for the quarter amounted to JPY608.4bn (+25.9% YoY) and OP amounted to JPY158.6bn (+36.1% YoY).
• Albeit strong performance across topline and bottomline, the company downgraded the sales units forecast for the Switch from 20m to 17m for FY03/19. Switch unit sales continue to be heavily driven by software releases. The company has only two hit software releases planned for 4QFY03/19. As such, the company has not made any changes to guidance. 
• The company continues to broaden its reach in the mobile gaming market with two releases set for summer 2019. While this may help the company reduce its reliance on gaming consoles over the long run, currently, mobile games make up less than 10% of the company’s topline.
• Based on our estimates, Nintendo is currently trading at a FY1 EV/EBIT multiple of 11.4x, lower than its historical median of 13.4x.

5. Kao Corporation, 4QFY2018 Results Falls Short of Guidance

Picking up from where we left off Market Largely Untroubled by Kao’s Troubles, Kao Corp (4452 JP) announced its FY2018 results yesterday (4^th February). Kao’s Revenue grew 1.2% YoY in FY2018 to reach JPY1,508bn, while its EBIT margin improved by 10bps to reach 13.8%. Despite that, both revenue and EBIT fell short of company guidance for FY2018.