Daily TMT & Internet: MonotaRO (3064 JP): Strong Finish to FY Dec-18 and more

In this briefing:

1. MonotaRO (3064 JP): Strong Finish to FY Dec-18
2. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
3. Toshiba Buyback: Proceeding Apace, But That’s Slow
4. GER Upcoming EVENTS Calendar
5. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price

1. MonotaRO (3064 JP): Strong Finish to FY Dec-18

In the three months to December, MonotaRO’s domestic (parent company) sales continued to grow at an annual rate close to 25%, indicating that full-year consolidated results should be close to management’s guidance and our own estimates. This also suggests that our 18% sales growth forecast for 2019 could be conservative.  

Parent company data for December show sales up 18.4% year-on-year  in nominal terms, but up 24.6% when adjusted for the number of working days in the month. The figures for November were 27.3% growth in nominal terms, but 21.3% adjusted.

In the three months to December, adjusted sales were up 24.2%, a slight improvement from 23.9% growth in 3Q. In FY Dec-18 as a whole, reported parent company sales were up 24.4% to ¥105.3 billion, slightly exceeding management’s ¥104.1 billion guidance. 

At ¥2,523 (Friday, January 11, close), the shares have dropped 25% since October. They  are now selling at 61x our EPS estimate for FY Dec-18, 54x our estimate for FY Dec-19 and 47x our estimate for FY Dec-20. Price/sales multiples for the same three years are 5.7x, 4.8x and 4.2x.

Consolidated results for FY Dec-18 are due to be announced by the end of January. 

2. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).

We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management. 

This note focuses on four key issues facing the Chinese telcos in 2019:

• 5G capex (March) (this is by far the most important),
• Regulatory newsflow (February/ March),
• Operating trend improvements (August), and
• Emerging business opportunities driving future growth (August).

We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick.  The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96. 

3. Toshiba Buyback: Proceeding Apace, But That’s Slow

In November 2017, Toshiba Corp (6502 JP) bowed to the inevitable and issued shares in order to shore up shareholder equity ahead of the 31 March 2018 deadline where if the company had not announced a positive shareholder equity number, it would have been delisted according to the Enforcement Rules of the Tokyo Stock Exchange. 

So it issued ¥600 billion of equity in an accelerated privately-negotiated placement to hedge funds. There was some jawboning later from domestic institutions who had not gotten the show on the deal, but they would do well to remember that when Toshiba was in dire straits earlier that year, and continued listing was not guaranteed because of accounting issues which were later overcome (before the equity issuance), it was the hedge funds who bought dozens of percent of the company – not domestic financial institutions. In any case, the equity was predictably needed, but as a way of making it clear that it would not be forever, the release accompanying the financing said the company would accelerate returns to shareholders once the sale of Toshiba Memory Corporation was complete. 

That return of capital to shareholders was announced in June 2018 after the closing of the TMC transaction had been confirmed. Toshiba would buy back ¥700 billion of shares. At the time, that was up to 40% of shares outstanding, but the shares rose as the shares of companies with large buyback plans do, and it took until November to dot the “i”s and cross the “t”s on making sure that the cash in the bank account was deemed distributable capital surplus. On November 8th, a year after announcing the sale of equity, Toshiba announced the start of a Very Large Buyback. A few days later the company announced a large ToSTNeT-3 buyback, offering to buy back all  ¥700 billion of shares the following morning at that day’s close. A week later the company had bought back ¥243 billion or more than 35% of the total buyback then announced further purchases would be made in the market. 

That’s when the fun began. 

For previous recent treatment on the Toshiba buyback, see the following:

    Toshiba: King Street’s Buyback Proposals Lack Required Detail (5 Oct 2018)
    Toshiba’s Buyback – How It Might Work (9 Nov 2018)
    Toshiba’s ToSTNeT-3 Buyback: Unwinding? Another Game of 🐓? (12 Nov 2018)
    Toshiba ToSTNeT-3: Round 2 (¥579bn To Go) (14 Nov 2018)
    Toshiba ToSTNeT-3 Buyback Means 1/3 Done. Off To Buy In The Market Now! (21 Nov 2018)
    Toshiba Buyback Update – Not Banging Down Doors To Get Stock Yet (3 Dec 2018)

4. GER Upcoming EVENTS Calendar

We have received requests to provide a calendar of upcoming catalysts for near-term M&A, stubs and erstwhile event-driven names. Below is a list of catalysts over the near-term for such names as below. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

5. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price

After initially being very skeptical of the China Tower (788 HK) IPO given it is essentially a price take to its three largest shareholders, we changed our view in early December to a more positive outlook. What changed our view has been series of calls and meetings with the company that suggested a more shareholder friendly approach than expected and a real opportunity to reduce capex substantially through the use of “social resources” (e.g. electricity grid, local government sites). These can be used to deliver co-locations without building towers and poles and imply much lower capital intensity at a time when revenue growth will be accelerating as 5G is rolled out.  Management has also given more detail on non-Tower business prospects which can generate higher returns (not under the Master Services Agreement). While small now (2% of revenue) they are growing rapidly. With lower capex than initially guided and a more shareholder friendly management (i.e. higher dividends are possible) we reduce the SOE discount and raise our forecasts (again). We remain at BUY with a new target price of HK$2.20