In this briefing:
1. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs
Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.
Revenue and Operating Profit Fell Below Consensus Estimates for 3QFY03/19
JPY (bn) | 3QFY03/18 | 3QFY03/19 | YoY Change | Consensus | Company Vs. Consensus |
Revenue | 202.6 | 199.2 | -1.7% | 201.6 | -1.2% |
Operating Profit | 22.4 | 17.6 | -21.5% | 20.0 | -12.0% |
OPM | 11.1% | 8.8% |
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The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.
Operating Profit for 9MFY03/19 Declined by More than Half Compared to a Year Ago
JPY (bn) | 9MFY03/18 | 9MFY03/19 | YoY Change | Consensus | Company Vs. Consensus |
Revenue | 572.1 | 581.0 | 1.6% | 583.4 | -0.4% |
Operating Profit | 59.8 | 20.6 | -65.6% | 23.0 | -10.4% |
OPM | 10.5% | 3.5% |
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The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.
2. CyberAgent: Tumbling Dice
![](https://static-prod.smartkarma.com/images/media/000/078/315/original/2019-02-09_12-04-43.png?1549681495)
Source: Japan Analytics
TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months. The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.
![](https://static-prod.smartkarma.com/images/media/000/078/317/original/2019-02-09_12-52-50.png?1549684397)
SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly, while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index.
This Insight will review: –
- CyberAgent’s growth strategy
- The company’s track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins
- The three main business segments – Internet Advertising, Game Software, and Media
- Cash Flow and Valuation
We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market’s current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago.
![](https://static-prod.smartkarma.com/images/media/000/078/318/original/2019-02-09_13-06-39.png?1549685220)
VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’. In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may.
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