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

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

Bottom-up Japan Equities Research

Equity Bottom-Up

<ul><li>Meiji Holdings will get slammed by government price cuts on pharmaceuticals in Japan from this April and then begin to see a massive decline in profitability of its anti-psychosis drug once its patent expires in December.</li><li>Combined, this should be at least a 10% drag on FY3/19 OP, raising the risks that the company guides for substantially lower numbers than consensus. Our estimates are for FY3/19 OP of Y94bn (-4% YoY), while consensus is at Y102bn (+4% YoY).</li><li>While this gap is not large and we expect management to guide for roughly flat profits YoY in FY3/19 (but miss in the end), the difference between OP growth and OP decline should be a big psychological swing factor for the share price. Meiji's share price has gone up by 3.9x over the past five years, as earnings have grown by a CAGR of +34% over that time.</li><li>Meiji's core earnings come from probiotic yogurt drinks and chocolates, which are performing well, but slowing as OP in this division has already doubled over the past 3 years. Nearly 90% of the +5% YoY OP growth seen in the Food division's 1H of FY3/18 came from cost-cutting efforts, which management says has largely run its course. Underlying sales were actually down a bit from last year's 1H.</li><li>The company announced last month that it aims to acquire a 49% stake in a blood plasma products/vaccine producer Kaketsuken, which it plans to consolidate onto its books from the 2H of FY3/19. While this could boost pharma sales by roughly 8% (based on 6 months of Kaketsuken's FY3/17 sales), the OP contribution may not be that significant as Kaketsuken had a recall of problematic plasma products in 2016. On its Japanese website (but not in the English version), Kaketsuken has a huge banner saying "Aiming to Restore Trust". </li><li>Furthermore, in recent talks with the company, they stressed that they've picked all the low-hanging fruit in terms of cost cuts and would now have to begin a multi-year phase of "investments for higher efficiencies". This sounded like a caveat that capex burdens could weigh on earnings over the next several years. Consensus estimates call for Meiji's capex falling by -4% to Y62bn in FY3/19.   </li><li>Valuations--based on our estimates, which are 7% lower than the Street but imply negative growth in FY3/19--are not demanding for a food company, with an FY3/19 PER of 22x and an EV/EBITDA of 9.8x.  But with a declining RoE (from 13.7% this fiscal year to 12.5% in FY3/19), the prospective PBR of 2.5x doesn't provide much support for the share price.</li><li>Our analysis of what Meiji could be worth if it were to sell its pharmaceutical division implies a value of at least Y12,000 per share, or 30% upside from current levels. It makes one wonder why activists haven't targeted Meiji yet but does explain why value investors like Capital have recently begun building positions.</li></ul>

Meiji Holdings will get slammed by government price cuts on pharmaceuticals in Japan from this April and then begin to see a massive decline in profitability of its anti-psychosis drug once its patent expires in December.Combined, this should be at least a 10% drag on FY3/19 OP, raising the risks that the company guides for substantially lower numbers than consensus. Our estimates are for FY3/19 OP of Y94bn (-4% YoY), while consensus is at Y102bn (+4% YoY).While this gap is not large and we expect management to guide for roughly flat profits YoY in FY3/19 (but miss in the end), the difference between OP growth and OP decline should be a big psychological swing factor for the share price. Meiji's share price has gone up by 3.9x over the past five years, as earnings have grown by a CAGR of +34% over that time.Meiji's core earnings come from probiotic yogurt drinks and chocolates, which are performing well, but slowing as OP in this division has already doubled over the past 3 years. Nearly 90% of the +5% YoY OP growth seen in the Food division's 1H of FY3/18 came from cost-cutting efforts, which management says has largely run its course. Underlying sales were actually down a bit from last year's 1H.The company announced last month that it aims to acquire a 49% stake in a blood plasma products/vaccine producer Kaketsuken, which it plans to consolidate onto its books from the 2H of FY3/19. While this could boost pharma sales by roughly 8% (based on 6 months of Kaketsuken's FY3/17 sales), the OP contribution may not be that significant as Kaketsuken had a recall of problematic plasma products in 2016. On its Japanese website (but not in the English version), Kaketsuken has a huge banner saying "Aiming to Restore Trust". Furthermore, in recent talks with the company, they stressed that they've picked all the low-hanging fruit in terms of cost cuts and would now have to begin a multi-year phase of "investments for higher efficiencies". This sounded like a caveat that capex burdens could weigh on earnings over the next several years. Consensus estimates call for Meiji's capex falling by -4% to Y62bn in FY3/19.   Valuations--based on our estimates, which are 7% lower than the Street but imply negative growth in FY3/19--are not demanding for a food company, with an FY3/19 PER of 22x and an EV/EBITDA of 9.8x.  But with a declining RoE (from 13.7% this fiscal year to 12.5% in FY3/19), the prospective PBR of 2.5x doesn't provide much support for the share price.Our analysis of what Meiji could be worth if it were to sell its pharmaceutical division implies a value of at least Y12,000 per share, or 30% upside from current levels. It makes one wonder why activists haven't targeted Meiji yet but does explain why value investors like Capital have recently begun building positions.

Meiji Holdings--Healthy Food Ops Have Heavy Drug Problems