Brief Japan: 2019 Semiconductors: 5%+ Decline and more

In this briefing:

1. 2019 Semiconductors: 5%+ Decline
2. Japan Stock Weekly
3. ZOZO: Earthbound
4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)
5. Misumi Group (9962 JP): Another Downward Revision

1. 2019 Semiconductors: 5%+ Decline

An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers.  In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.

2. Japan Stock Weekly

NGK Spark Plug (5334) – results in line, the shares are very cheap. The business should should continue to see steady growth – BUY

Foster (6794) – upward for the full year. This is nonetheless a poor year for the company but it is addressing this and earnings will bounce next year. 

M&A Capital (6080) – results much better and expected, and after poor second have next year, mainly due to timing of bookings, growth set to continue. 

Vector (6058) – BUY – this PR agent is oversold but growing fast. 

3. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

5. Misumi Group (9962 JP): Another Downward Revision

Misumi Group sold off after announcing poor 3Q results and another downward revision to FY Mar-19 sales and profit guidance, but bounced right back to finish at ¥2,480 yesterday (January 31), which is 30x management’s new EPS estimate for this fiscal year. Price/book value (as of the end of December) is 3.6x. The indicated dividend was cut in line with guidance, maintaining management’s 25% payout ratio target but resulting in a dividend yield of 0.8%.

Operating and net profits are now expected to decline. Management is guiding for a 7.1% increase in sales in FY Mar-19 as a whole, but monthly data shows year-on-year growth dropping to 5.2%  in November and 3.1% in December. Factory Automation sales were unchanged in November and down 1.3% in December, 

In the three months to December, operating profit dropped 17.8% year-on-year on a 5.7% increase in sales, with Factory Automation profit down 16.9% and VONA profit down 35.4%. Inventory was up while receivables were down. Sales growth in China turned negative. 

The company continues to invest in production capacity, logistics and IT, aiming to expand its Factory Automation and VONA e-commerce businesses in Japan, Asia, America and Europe. The goal is to create a unified, cloud-based, rapid-response distribution system with the world’s largest components and production materials database. The anticipated success of this plan appears to explain both the rebound in the share price and relatively high current valuation, but with the China growth trajectory broken and the economic outlook uncertain, it may take longer and come with lower margins than originally expected.