Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

Mazda: After Integration of Sales Financing with Toyota, How Long Till Toyota Ups Its Stake?

Mazda Motors Down 3% Following Q1 Results

Mazda: 1QFY18 Results DisappointDeclining Margins Despite Higher Cross over Sales

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Event-Driven

The Nikkei Shimbun predicted last Friday that Mazda will likely lower FY3/19 operating profit outlook by 29% to Y75bn, from current forecasts of Y105bn (consensus is at Y96.5bn).  This is largely due to the one-off negative impact of the flood around Mazda's factories in southern Japan during July (-Y20bn hit to earnings, according to the Nikkei) and stronger than expected currency headwinds (-Y10bn), mainly from the weak Australian dollar. Both of these points are largely factored into the share price. However, the Nikkei's report that earnings would only be revised down to Y75bn appears surprisingly optimistic. Mazda Could Guide Much Lower than Nikkei Forecasts: If the numbers forecast by the Nikkei are indeed what Mazda plans for, it could be met with skepticism, as the current auto demand environment is weakening quickly and currency headwinds are 60% stronger than Mazda had originally forecast for the 2H of this fiscal year. We expect only Y63bn in full-year OP at Mazda, and this is with generous assumptions for a sharp rebound in output during Q3 of FY3/19 (see details below and table-1). This would be 20% lower than the Nikkei's prediction of Y75bn and 35% lower than consensus estimates of Y96.5bn. Mazda is scheduled to announce Q2 results on October 31st after market close. Europe is a High-Risk Factor and Mazda's Exposure is Large: At 17% of global sales volume in FY3/18, Mazda has the highest exposure to Europe among Japanese automakers. While Q2 sales volumes for Mazda in the region during Q2 were flat YoY, incentives are rising, possibly more than Mazda expected. This is due to the new-model effect from Mazda's popular CX-5 SUV having run its course and steeper competition from European automakers, who are discounting cars due to bloated inventories from delays in meeting stricter European emission standards (WLTP).  Daimler and BMW have already made profit warnings because of this. Capex Set to Double over the Next 2 Years: Mazda's capex plans this year are set to grow by 67% to Y145bn ($1.3bn) in FY3/19 and should peak out at around Y200bn in FY3/21, as it expands capacity at the new Alabama plant being jointly-developed with Toyota Motor. This steep rise in capex comes at a time when global auto demand is dropping after 8 years of of consecutive growth through 2017 and should lead to negative free cash flow (FCF) over the next two years due to Mazda's high investment plans. Mind the Dividend--Payout Ratio Surpassing 50% this Fiscal Year: On our assumptions of Y63bn in FY3/19 OP, Mazda's dividend per share of Y35 becomes an increasing burden to the company (see Chart-1) as it amounts to 53% of our FY3/19 net profit estimate of Y39bn (consensus is at Y79bn and the Nikkei said Mazda would guide down from Y80bn to Y50bn). After five years of positive FCF, Mazda should see negative FCF of -Y19bn in FY3/19 and this should widen to -Y35bn in FY3/20, making its annual Y21bn in dividend payouts a bigger drain on net cash. Mazda's PBR is Low but so is Growth for a While: Mazda does not appear that cheap at these levels mainly because of tough growth prospects over the next 3 years. The PER of 17x our FY3/20 estimates is higher than the average 10x for Japanese rivals. Same goes for its EV/EBITDA multiple of 4.2x versus rivals at 3.8x. And while the PBR of 0.60x is approaching the all-time low of 0.52x recorded in FY3/13, Honda is at a PBR of 0.58x FY3/20 consensus estimates, yet has stronger footing in the market.  Would Toyota raise its stake in Mazda if the PBR were to become cheaper? We think there's no rush, and explain the details why via a comparison of Toyota's take-out of former minicar affiliate, Daihatsu Motor, below.

The Nikkei Shimbun predicted last Friday that Mazda will likely lower FY3/19 operating profit outlook by 29% to Y75bn, from current forecasts of Y105bn (consensus is at Y96.5bn).  This is largely due to the one-off negative impact of the flood around Mazda's factories in southern Japan during July (-Y20bn hit to earnings, according to the Nikkei) and stronger than expected currency headwinds (-Y10bn), mainly from the weak Australian dollar. Both of these points are largely factored into the share price. However, the Nikkei's report that earnings would only be revised down to Y75bn appears surprisingly optimistic. Mazda Could Guide Much Lower than Nikkei Forecasts: If the numbers forecast by the Nikkei are indeed what Mazda plans for, it could be met with skepticism, as the current auto demand environment is weakening quickly and currency headwinds are 60% stronger than Mazda had originally forecast for the 2H of this fiscal year. We expect only Y63bn in full-year OP at Mazda, and this is with generous assumptions for a sharp rebound in output during Q3 of FY3/19 (see details below and table-1). This would be 20% lower than the Nikkei's prediction of Y75bn and 35% lower than consensus estimates of Y96.5bn. Mazda is scheduled to announce Q2 results on October 31st after market close. Europe is a High-Risk Factor and Mazda's Exposure is Large: At 17% of global sales volume in FY3/18, Mazda has the highest exposure to Europe among Japanese automakers. While Q2 sales volumes for Mazda in the region during Q2 were flat YoY, incentives are rising, possibly more than Mazda expected. This is due to the new-model effect from Mazda's popular CX-5 SUV having run its course and steeper competition from European automakers, who are discounting cars due to bloated inventories from delays in meeting stricter European emission standards (WLTP).  Daimler and BMW have already made profit warnings because of this. Capex Set to Double over the Next 2 Years: Mazda's capex plans this year are set to grow by 67% to Y145bn ($1.3bn) in FY3/19 and should peak out at around Y200bn in FY3/21, as it expands capacity at the new Alabama plant being jointly-developed with Toyota Motor. This steep rise in capex comes at a time when global auto demand is dropping after 8 years of of consecutive growth through 2017 and should lead to negative free cash flow (FCF) over the next two years due to Mazda's high investment plans. Mind the Dividend--Payout Ratio Surpassing 50% this Fiscal Year: On our assumptions of Y63bn in FY3/19 OP, Mazda's dividend per share of Y35 becomes an increasing burden to the company (see Chart-1) as it amounts to 53% of our FY3/19 net profit estimate of Y39bn (consensus is at Y79bn and the Nikkei said Mazda would guide down from Y80bn to Y50bn). After five years of positive FCF, Mazda should see negative FCF of -Y19bn in FY3/19 and this should widen to -Y35bn in FY3/20, making its annual Y21bn in dividend payouts a bigger drain on net cash. Mazda's PBR is Low but so is Growth for a While: Mazda does not appear that cheap at these levels mainly because of tough growth prospects over the next 3 years. The PER of 17x our FY3/20 estimates is higher than the average 10x for Japanese rivals. Same goes for its EV/EBITDA multiple of 4.2x versus rivals at 3.8x. And while the PBR of 0.60x is approaching the all-time low of 0.52x recorded in FY3/13, Honda is at a PBR of 0.58x FY3/20 consensus estimates, yet has stronger footing in the market.  Would Toyota raise its stake in Mazda if the PBR were to become cheaper? We think there's no rush, and explain the details why via a comparison of Toyota's take-out of former minicar affiliate, Daihatsu Motor, below. 

Mazda (7261)--Things Are Likely Worse Than the Headlines