In this briefing:
- Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
- Monthly Geopolitical Comment: Waiting for Trump and Xi to Clinch a Deal
- Subaru: Another Month, Another Recall
- Japan Stock Weekly
- Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.
At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below).
2. Monthly Geopolitical Comment: Waiting for Trump and Xi to Clinch a Deal
In the past month, positive announcements from both sides stoked hopes for a trade deal between the US and China. Meanwhile, global security deteriorated, with two more regions finding themselves on a brink of war. A major terrorist act in Kashmir provoked a sharp increase in tensions between India and Pakistan. Venezuela’s opposition leader has called for foreign powers to intervene after deadly clashes on the Colombian border. On the other hand, investors should be relieved by the relatively calm situation in Nigeria where incumbent president Buhari won the election last weekend. In Brazil, newly elected president Bolsonaro hopes to push through radical pension reform.
3. Subaru: Another Month, Another Recall
Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.
4. Japan Stock Weekly
Hitachi Chemical (4217) – bad news now all in the price and and the shares are cheap, we expect earnings to recover to 3/20.
Optorun (6235) – a strong beneficiary of the 5G roll out.
Grace Technology (6541) – a very interesting micro-cap with strong growth potential. M&A has the potential to significantly reduce the stated per.
5. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.
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