Brief Japan: Recruit Holdings Reports Strong 3Q Results; Remains Expensive and more

In this briefing:

1. Recruit Holdings Reports Strong 3Q Results; Remains Expensive
2. Daiwa House REIT Placement – Well-Flagged but Barely Accretive to DPU
3. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business
4. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021
5. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

1. Recruit Holdings Reports Strong 3Q Results; Remains Expensive

Recruit Holdings (6098 JP) reported its 3Q FY03/19 financial results on Wednesday (13th February). Recruit’s revenue and EBITDA were up 6.0% YoY and 11.1% YoY respectively in 3Q FY03/19. This was mostly due to 1) consolidation of the results of Glassdoor Inc. (the company which operates the employment information website glassdoor.com), 2) steady growth in Japanese staffing operations and 3) growth in beauty and real estate app users during the quarter, partially offset by slowdown in global recruitment activity.

2. Daiwa House REIT Placement – Well-Flagged but Barely Accretive to DPU

Daiwa House Reit Investment (8984 JP) (DHR) is raising about US$329m in its placement to fund the acquisition of properties.

The deal scores well on our framework owing to strong price and earnings momentum. The assets to be acquired are a good mix of logistics, retail, and hotel. 

However, the properties to be acquired mostly have an NOI yield lower than the average NOI yield of DHR’s existing assets in the respective asset classes. Despite increasing the portfolio value by almost 10%, the ten properties are only expected to be 1.37% accretive to DPU. 

That said, DHR’s acquisition has been well-flagged as it was highlighted in its September presentation.

3. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business

GMO Internet, Inc. (9449 JP) announced its consolidated financial results for its full-year FY12/18 yesterday (12^th February). Despite heavy losses incurred in the cryptocurrency mining business in FY12/18, GMO managed to achieve a solid year with 20% YoY growth in top-line alongside a 23.5% YoY growth in operating profits. Excluding the crypto losses, the operating profit increased 35.7% YoY, with an OPM of 13.2% compared to 11.4% reported a year ago. For the full-year, the company has reported a net loss of JPY20.7bn as opposed to a net profit of JPY8bn in FY12/17, blaming the crypto losses for the decline. For FY12/18, the management has proposed a dividend of JPY29.5 per share (compared to JPY23 paid in FY12/17) in spite of reporting net losses for the fiscal year. Further, the company has also allocated JPY1.36bn (equivalent to 0.7% of outstanding shares at the current price) for share repurchases in FY2019.

GMO is currently trading at JPY1,741 per share which we believe is undervalued compared to its combined equity stake in 8 listed subsidiaries. The company share price has lost more than 40% since it peaked in June last year due to the negativity surrounding its cryptocurrency and mining segment. However, we believe further downside is limited as the company has closed down a majority of its mining related business which weighs very little on the consolidated performance of the company. Further, the company’s key businesses, Internet Infrastructure, Online Advertising & Media and Internet Finance generate solid recurring revenues, which should help the company achieve strong growth. Following its earnings announcement, the share price gained 5.6% from the previous days close.

4. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.

5. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.