Daily Brief Japan: IBJ, Terumo Corp, Koito Manufacturing, Dentsu Inc, M&A Capital Partners, JTEC Corp/Osaka, Sodick Co Ltd and more

• Terumo Corp (4543 JP) reported better-than-expected H1FY25 result, with revenue, operating profit, and net profit all reached record highs for the first half. Profit margins continued to improve.
• Revenue from C&V business grew 15% YoY to ¥306B (~60% of total revenue). More than 60% of the growth came from TIS (catheter) division, which grew 14% YoY to ¥201B.
• Terumo has revised FY25 guidance upward, reflecting strong performance and changes in foreign exchange assumptions. Both revenue and profits are expected to reach record high in FY25.

• Orbis Japan Equity Fund recently wrote about auto supplier Koito Manufacturing (7276 JP) in their second-quarter 2024 letter.
• So, who is Koito? It’s the world’s largest manufacturer of automotive lighting products, serving primarily Japanese customers such as Toyota, Nissan and Honda.
• What stood out in Orbis’s second-quarter letter is that Koito plans to return JPY 350 billion to shareholders in the next five years, more than half the current market cap. Rational capital allocation is rare in Japan, so this number caught my attention.

Dentsu posted Q324 organic net revenue growth of 0.3%, making a decline of 1.1% over the nine-month period. This is slightly below expectations at the half-year and, as the market for larger, transformational projects is still stagnant, management has trimmed full year organic revenue growth guidance to 0% (was 1%) and that for adjusted operating profit by 7%. There are positive elements to these figures, in particular continuing progress in Japan and good new business boosted by the ‘one dentsu’ initiative. The unveiling of the mid-term management plan has been delayed to February 2025, with the FY24 figures. Post the reaction to the Q3 figures, the shares now trade at a 10% discount to peers on EV/EBITDA.

• FY09/24 revenue was JPY19.2bn, a decline of 8.1% YoY, with operating profit at JPY6.4bn, down 14.4%.
• FY09/24 net income attributable to owners increased 5.6% YoY to JPY4.5bn, with a 104.4% achievement rate.
• The company targets 376 deals and 405 consultants by FY09/27, with a CAGR of 19.4% and 31.0%.

• Improving sales mix lift gross margins – Gross margin increased to 65.9% in Q1 FY6/25 from 52.5% the previous year, demonstrating an improvement in the sales mix at the core Optical business segment which experienced demand for high-precision products with premium pricing.
• While operating losses remained relatively flat YoY, the company is investing in IT systems that will improve its production and sales management which we believe will improve the quality of earnings, as well as assist in new business development.
• Overall, we believe the company performed in line with guidance, with no change regarding expectations of the earnings profile to be concentrated in H2 FY6/25.

• Reforms transforming returns – Although the demand environment remains somewhat mixed, we believe that demand has bottomed for the key product Electronic Discharge Machines.
• Q1-3 FY12/24 results highlighted that definitive progress is being made in terms of raising returns through structural reforms.
• This focus on raising profitability can be seen through upselling activities and improved factory utilization.