Director, Pearl Hill Advisors

Nicholas Tanner

Director

Pearl Hill Advisors

Equity Bottom-Up

<p>This is a good long term buy. Although first half results fell slightly short of expectations, this was largely due to an earthquake in Hokkaido as well as disruptions relating to typhoons in the second quarter. These factors knocked Y1.8bn off operating profit which came in at Y42.1bn (-8%). The company has kept its full year forecast unchanged and, in our view, this is achievable (operating profit of Y102bn (+3%)). Next year we would look for Y114bn (+12%), slightly higher than the current consensus of Y110bn but below their mid-term target of Y120bn. Nonetheless, the business in our view will continue to see steady profits growth over the next few years. The shares are on 14x 3/19 earnings. We are happy to stick with this name on a long-term basis.</p><p>The shares now are oversold, they have underperformed TOPIX by 12% over the last 12 months. Yet, this is a great company that has been and is very much focussing on profitability and shareholder returns. Its operating profit margin has risen from nothing in 3/01 (it posted a small loss then) to 9% last year as it has focussed on the development of higher margin niche products. Its returns to shareholders are now 50%, 30% via a dividend and 20% through share buy backs, which are then cancelled. Its ROE has thus risen from 0.5% in 1995 to 11% last year. And the shares are cheap, they trade on 12x 3/20 earnings and just over 4x EV/ebitda. There will be further growth next year. We would buy the shares here.</p>

This is a good long term buy. Although first half results fell slightly short of expectations, this was largely due to an earthquake in Hokkaido as well as disruptions relating to typhoons in the second quarter. These factors knocked Y1.8bn off operating profit which came in at Y42.1bn (-8%). The company has kept its full year forecast unchanged and, in our view, this is achievable (operating profit of Y102bn (+3%)). Next year we would look for Y114bn (+12%), slightly higher than the current consensus of Y110bn but below their mid-term target of Y120bn. Nonetheless, the business in our view will continue to see steady profits growth over the next few years. The shares are on 14x 3/19 earnings. We are happy to stick with this name on a long-term basis.The shares now are oversold, they have underperformed TOPIX by 12% over the last 12 months. Yet, this is a great company that has been and is very much focussing on profitability and shareholder returns. Its operating profit margin has risen from nothing in 3/01 (it posted a small loss then) to 9% last year as it has focussed on the development of higher margin niche products. Its returns to shareholders are now 50%, 30% via a dividend and 20% through share buy backs, which are then cancelled. Its ROE has thus risen from 0.5% in 1995 to 11% last year. And the shares are cheap, they trade on 12x 3/20 earnings and just over 4x EV/ebitda. There will be further growth next year. We would buy the shares here.

Sekisui Chemical (4204) Near Term Weakness Is Opportunity to Buy