Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Securities analyst covering electronics, precision equipment & robotics, engineering, construction, transport and other sectors for more than 25 years in Japan and 3 years in Korea. Permanent resident of Japan.

Senior Technology Analyst, Japanese Equities

Hitachi Transport & SG Holdings:  Consciously Uncoupling

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

Hitachi Transport System / Equity Bottom-Up

The shares of Hitachi Transport System have had a good run, more than doubling over three years to an all-time high of ¥3,545 on July 2, 2019 before dropping back 11% to close at ¥3,165 on September 27. At this price, they are selling at 16x management's EPS guidance for FY Mar-20 and 1.6x book value as of the end of June. These valuations are near the top of their 5-year ranges, but calculations by Japan Analytics indicate 10% potential upside to a forecast-based no-growth valuation (see charts below). The rise in the share price has been driven by efficiency gains in the company's domestic and global logistics businesses. In the four fiscal years to Mar-19, revenues increased 4.5% to ¥708.8 billion, operating profit increased 45.3% to ¥31.2 billion, the operating margin rose from 3.2% to 4.4%, and ROE rose from 7.6% to 10.2%. In the three months to June, operating profit increased 7.0% year-on-year on a 2.9% decline in revenues. Revenues declined due to a change in the scope of consolidation, declining volumes in the auto parts business and the appreciation of the yen. For FY Mar-20 as a whole, management is guiding for a 1.0% increase in operating profit to ¥31.5 billion on a 1.2% decline in revenues to ¥700 billion, resulting in an operating margin of 4.5%. By FY Mar-22, management expects operating profit to reach ¥36.0 billion on revenues of ¥720 billion, the operating margin rising to 5.0% due to a combination of growth and further improvements in the cost structure.  M&amp;A could lift revenues to ¥800 billion, although the timing of acquisitions and their profitability are uncertain.1Q results suggest that full-year guidance is conservative, while further outsourcing of global supply chain management - perhaps accelerated by the changes forced on supply chains by the trade war - should support management's longer-term plans. The biggest risks to those plans and to investors appear to be recession and yen appreciation.

The shares of Hitachi Transport System have had a good run, more than doubling over three years to an all-time high of ¥3,545 on July 2, 2019 before dropping back 11% to close at ¥3,165 on September 27. At this price, they are selling at 16x management's EPS guidance for FY Mar-20 and 1.6x book value as of the end of June. These valuations are near the top of their 5-year ranges, but calculations by Japan Analytics indicate 10% potential upside to a forecast-based no-growth valuation (see charts below). The rise in the share price has been driven by efficiency gains in the company's domestic and global logistics businesses. In the four fiscal years to Mar-19, revenues increased 4.5% to ¥708.8 billion, operating profit increased 45.3% to ¥31.2 billion, the operating margin rose from 3.2% to 4.4%, and ROE rose from 7.6% to 10.2%. In the three months to June, operating profit increased 7.0% year-on-year on a 2.9% decline in revenues. Revenues declined due to a change in the scope of consolidation, declining volumes in the auto parts business and the appreciation of the yen. For FY Mar-20 as a whole, management is guiding for a 1.0% increase in operating profit to ¥31.5 billion on a 1.2% decline in revenues to ¥700 billion, resulting in an operating margin of 4.5%. By FY Mar-22, management expects operating profit to reach ¥36.0 billion on revenues of ¥720 billion, the operating margin rising to 5.0% due to a combination of growth and further improvements in the cost structure.  M&amp;A could lift revenues to ¥800 billion, although the timing of acquisitions and their profitability are uncertain.1Q results suggest that full-year guidance is conservative, while further outsourcing of global supply chain management - perhaps accelerated by the changes forced on supply chains by the trade war - should support management's longer-term plans. The biggest risks to those plans and to investors appear to be recession and yen appreciation.

Hitachi Transport System (9086 JP): Uptrend Should Resume