In this briefing:
- SMC (6273 JP): Profits Start to Decline
- Independent Director Is a Great Way to Supplement Retirement in Japan….
- Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets
- Core US Sectors Leading an S&P Major Support Break
- Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
1. SMC (6273 JP): Profits Start to Decline
SMC’s year-on-year profit comparisons have turned negative. In the three months to September (Q2 of FY Mar-19), gross profit was down 3.7% year-on-year, operating profit was down 8.8% and net profit was down 9.6%. Operating profit was down 15.1% from Q1. Sales were up only 0.4% year-on-year in Q2, compared with 29.0% growth a year earlier, and down 7.5% from Q1. Management responded by cutting full-year guidance, implicitly changing anticipated 2H operating profit growth from +3.0% to -9.3% year-on-year.
This has all been discounted. The share price dropped 43% from its 52-week and all-time high of ¥55,830 on January 18 to a 52-week low of ¥31,580 on October 28, then rebounded to ¥40,000 in early December. Last Friday, December 14, it closed at ¥34,840.
What happens next? The share price trend suggests that because year-on-year profit comparisons have finally turned negative, it’s time to start anticipating recovery. But the fundamentals indicate that profit comparisons are likely to remain very difficult and most probably negative for at least three more quarters. Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China. The length and depth of the downturn and the timing and strength of recovery are both unclear. Any positive news on the trade front should support the share price, but while trade friction aggravates the cyclical downturns in the semiconductor and auto industries, it is not their cause.
At ¥34,840, the shares are selling at 17.0x our EPS estimate for FY Mar-19 and 17.7x our estimate for FY Mar-20. These multiples compare with a 5-year historical range of 13.8x – 28.5x. Our projected EV/EBITDA multiples for the same two years are 8.7x and 8.1x, which compare with a 5-year historical range of 7.0x – 15.1x. This should help put a floor under the share price. Interestingly, Japan Analytics’ chart analysis indicates that SMC has never been seriously overbought (see chart below).
A leading supplier of pneumatic and other automated control equipment for the electronics, auto, machine tool and other industries, SMC is highly geared to investment in semiconductor production capacity and factory automation.
2. Independent Director Is a Great Way to Supplement Retirement in Japan….
We all know that Japan has tried to give the impression that they are improving corporate governance. However, when you start to dig into the numbers you see that it is basically just window dressing. We looked at the ages of the Independent Directors and they are not young…. Most should be gardening somewhere in Shizuoka.
3. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets
- New industry data this week, plus take-aways from our latest discussions with company managements, all confirm that the likely trend in the industrial segment of the global real estate industry is for rental rates to rise.
- The growth in e-commerce is continuing to accelerate globally. In some key market, this is “triggering a land grab for distribution space that experts say is accelerating”.
- Therefore, the increasing scarcity value of well situated industrial real estate in high demand markets is likely to continue to push up rental rates to higher and higher levels.
- Given our expectation that fundamentals driving the growing demand for Last Mile Industrial real estate are likely to persist, we continue to expect this segment to outperform the broader Real Estate sector for the foreseeable future.
4. Core US Sectors Leading an S&P Major Support Break
We see increasing evidence of a failed December risk on phase as core sectors break below supports and early 2018 lows in a lead fashion.
Our underperform/bear call for banks, small caps, tech and transports to lead a bigger market spiral is taking shape. Small caps, banks and transports are now breaking early 2018 lows, signaling a broader S&P break below 2,600 may in fact be unfolding now rather than in January/Q1.
Fed speak will dominate a break/bounce next week but a break down is in the cards, regardless in 2019.
Breadth remains bearish.
USD/JPY teetering on a pattern breakout. Gold is not trading well given it has decoupled from traditional correlations.
Big net outflows recorded in key sectors/markets last week.
5. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
As we mentioned in a comment in Japan Display: Cost Structure Improvement Is Good but Shipment Delay and IPhone XR Cloud Outlook the NHK reported last night that JDI was in talks with a Chinese consortium to secure something in the region of ¥50bn in funding (more than its market cap yesterday) for a more than 33% stake in the company. The Nikkei shed light on the identities of some of the consortium this morning mentioning investment fund Silk Road, Minth Group Ltd (425 HK) and Shenzhen O Film Tech Co A (002456 CH). Bloomberg has also mentioned that the consortium could invest a further ¥500bn to establish a new facility in China for the production of OLED panels.
We spoke to the company this morning to get colour on these announcements.
