Brief Equities Bottom-Up: Yellow Cake (YCA) – Great Idea, Wrong Time! and more

In this briefing:

1. Yellow Cake (YCA) – Great Idea, Wrong Time!
2. Oil Majors Results: The Main Take-Aways. We Are Positive on Hess, Valero and Chevron
3. Mizuho Financial Group (8411 JP):  Under Pressure
4. SMFG (8316 JP): On Target But Drifting Off Radar
5. Keyence (6861 JP): Deceleration Continues in 3Q

1. Yellow Cake (YCA) – Great Idea, Wrong Time!

• Yellow Cake PLC (YCA LN) is a pure play on the uranium price
• Spot Price $28.90/lb U₃O₈ & L.T. Price remains $32/lb U₃O₈
• Share price trading at ~2% discount to NPV
• Despite recent production cuts, primary & secondary supplies cover world demand
• Est. surplus ~500ktU, representing six years of global primary production
• Global nuclear generation peaked in 2006
• Forecast world uranium demand to decline between 25% and 40% by 2050
• 1-year Target Price £1.98-2.02 ps NPV_4% assuming $24/lb U₃O₈
• 3-year Target Price £1.57-1.77 ps NPV_4% assuming $21/lb U₃O

2. Oil Majors Results: The Main Take-Aways. We Are Positive on Hess, Valero and Chevron

A number of the largest oil companies in the U.S. and Europe reported results last week including Exxon Mobil (XOM US) , Chevron Corp (CVX US) and Royal Dutch Shell (RDSA LN), all showing strong share price performance on the back of their results and outlook statements.

We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.

3. Mizuho Financial Group (8411 JP):  Under Pressure

Results for the nine months to end-December 2018, reported on 31 January 2019 by Mizuho Financial Group (8411 JP), or MHFG for short, reveal the continuing pressure on management to stabilize revenues and profitability.  MHFG reported consolidated recurring profits for the nine months to end-December 2018 of ¥547.56 billion (down 15.0% YoY) and net profits of ¥409.92 billion (down 13.8% YoY) on higher revenues of ¥2.858 trillion (+6.9% YoY).  Core earnings dropped into the red as net interest and fee income is now insufficient to cover overhead expenses, while the group is running out of surplus loan-loss reserves to write back to profit to keep the megabank in the black.  On a quarterly basis, results were much worse: 3QFY3/2019 was the worst quarterly performance reported by the megabank group since 2Q FY3/2014, with recurring profits falling 62.2% YoY to ¥80.64 billion while net profits fell 68.2% to just ¥50.56 billion.  

Mizuho, which significantly outperformed both of its rival megabanks Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP) in share price performance terms throughout CY2018 (largely through having lower foreign ownership than the other two), is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

4. SMFG (8316 JP): On Target But Drifting Off Radar

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s full-year target of ¥700 billion for consolidated net profits.  Nevertheless, 3Q results (October-December 2018) were well down year-on-year, with rising funding costs and higher credit costs offsetting much of the positives from the earlier deconsolidation of its two retail banking subsidiaries.  Full-year guidance remains unchanged.  SMFG is now poised to exceed its ¥700 billion FY3/2019 consolidated net profit target, although probably not by much.

The megabanks are always a ‘crowded trade’ for foreign investors when it comes to exposure to the Japanese banking sector: the choice usually coming down to either MUFG or SMFG.  Mizuho, which significantly outperformed both MUFG and SMFG throughout CY2018, is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

5. Keyence (6861 JP): Deceleration Continues in 3Q

Keyence reported higher sales and profits but lower rates of growth in the three month to December. Consolidated sales were up 11.8% year-on-year compared with 15.2% growth in 2Q and 19.7% growth in 1Q. Operating profit was up 9.1% compared with 12.7% growth in 2Q and 21.2% growth in 1Q. The operating margin declined to 53.8% compared with 55.2% in 2Q, 54.6% in 1Q and 56.6% in 4Q of FY Mar-18.

Once again, the results at Keyence were much better than those at other factory automation related companies – notably Fanuc (6954 JP) and Omron (6645 JP), where operating profits dropped at double-digit rates. But Keyence is geared to incremental improvements rather than large capital outlays, and to customers’ R&D spending, and it has a diversified base of user industries. On the other hand, it is not immune to weakening demand in China, Europe and elsewhere.

Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 13%. At ¥57,270, the shares are now selling at 30x our EPS estimate for this fiscal year and 27x our estimate for FY Mar-20. Their 5-year historical P/E range is 18x – 42x. Other valuations are also well up in their historical ranges.

The sales and profit data suggest difficult year-on-year comparisons for the next few quarters.