In this briefing:
- MonotaRO (3064 JP): Strong Finish to FY Dec-18
- CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected
- Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
- Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield
- ZOZO – Buying a Stairway to Heaven
1. MonotaRO (3064 JP): Strong Finish to FY Dec-18
In the three months to December, MonotaRO’s domestic (parent company) sales continued to grow at an annual rate close to 25%, indicating that full-year consolidated results should be close to management’s guidance and our own estimates. This also suggests that our 18% sales growth forecast for 2019 could be conservative.
Parent company data for December show sales up 18.4% year-on-year in nominal terms, but up 24.6% when adjusted for the number of working days in the month. The figures for November were 27.3% growth in nominal terms, but 21.3% adjusted.
In the three months to December, adjusted sales were up 24.2%, a slight improvement from 23.9% growth in 3Q. In FY Dec-18 as a whole, reported parent company sales were up 24.4% to ¥105.3 billion, slightly exceeding management’s ¥104.1 billion guidance.
At ¥2,523 (Friday, January 11, close), the shares have dropped 25% since October. They are now selling at 61x our EPS estimate for FY Dec-18, 54x our estimate for FY Dec-19 and 47x our estimate for FY Dec-20. Price/sales multiples for the same three years are 5.7x, 4.8x and 4.2x.
Consolidated results for FY Dec-18 are due to be announced by the end of January.
MonotaRO is the only pure-play e-commerce MRO (Maintenance, Repair and Operation) investment in the Japanese stock market. With over 10,000 SKUs (stock keeping units – i.e., individual items, including gloves, hand and power tools, hardware, painting supplies, etc.) for sale to construction companies, manufacturers, auto repair shops and other customers, the company is both driving and benefitting from the growth of Japan’s B2B MRO market. Overseas subsidiaries in South Korea, Indonesia and China, which account for about 4% of consolidated sales, are not yet profitable.
2. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected
Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.
We analyze the results.
3. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management.
This note focuses on four key issues facing the Chinese telcos in 2019:
- 5G capex (March) (this is by far the most important),
- Regulatory newsflow (February/ March),
- Operating trend improvements (August), and
- Emerging business opportunities driving future growth (August).
We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick. The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96.
4. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield
Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.
In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.
Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:
- Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
- New five-year funding secured from two lenders
- MBK Partners buys ORIX Golf Management
- Value investor Hibiki Path Advisors buys 6.2% of the company
- Clear focus on acquisitions and using its balance sheet strength
With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.
5. ZOZO – Buying a Stairway to Heaven
ONWARD AND OUT – ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after Benefit One (2412 JP), Rizap (2928 JP), Takeda Pharmaceutical (4502 JP), Hoshizaki (6465 JP), and Workman Co Ltd (7564 JP). According to Nikkei XTECH, on 25th December apparel maker Onward (8016 JP) suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO’s private label. Since reaching our 4.0 ‘Overbought’ threshold on 9th July 2018, ZOZO shares have corrected by 57% – the worst performance of any large cap from that date – as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa. Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.
PRIVATE-LABEL STRETCH GOALS– The ‘teething problems’ of ZOZO entering the private-label apparel business have been well-documented by Michael Causton in a recent Insight on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO’s current and possible future financial condition as it strives to become one of the top-ten global fashion retailers.
‘ZOSO’ & THE STAIRWAY TO HEAVEN – In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X’s first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin’s untitled fourth album – known by fans as ‘Zoso’ after the symbol designed by Jimmy Page for the inner sleeve – come to mind:-
There’s a lad(y) who’s sure
All that glitters is gold
And (s)he’s buying a stairway to heaven
When(s)he gets there (s)he knows
If the stores are all closed
With a word (s)he can get what (s)he came for.
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