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Morningstar | Mitsui’s 3Q Earnings Underpinned By Resources and Energy Businesses; Shares Remain Overvalued. See Updated Analyst Note from 03 Feb 2019

No-moat Mitsui’s cumulative nine-month fiscal 2019 (ending March) net profit of JPY 350 billion, down 6% year over year, was within our expectation. After fine-tuning our earnings model to incorporate our latest commodity price deck and lower dividend from Vale, we keep our fair value estimate of JPY 1,530. Our bearish view on the firm is unchanged given its high exposure to energy and mining businesses. We believe Mitsui’s profitability will be constrained by our below-consensus midcycle commodity price assumptions.

There was little surprise in Mitsui’s results, with lower earnings from the mineral & metal resources division (due to absence of valuation gain on Valepar’s restructuring and falling iron ore prices) mitigated by better performance from the lifestyle and energy segments. The lifestyle business benefited from reversal of provisions from Multigrain and higher earnings contribution from IHH Healthcare. Meanwhile, the energy division was aided by firmer oil and gas prices, lower exploration expenses, and higher dividend from the LNG business. In particular, Mitsui’s dividend income is expected to be reduced by JPY 10 billion in fiscal 2019 as Vale has decided to suspend dividend payment that was scheduled in February due to the failure of a tailings dam at the iron ore mine in Brazil. Mitsui owns about a 5.6% stake in Vale but we do not expect the event to seriously affect cash flow as the firm’s cumulative nine-month operating cash flow remained sound at JPY 362 billion.

Despite management’s efforts in diversifying into nonresources businesses, such as machinery and infrastructure, chemicals, mobility, nutrition and agriculture, and retail and services, the firm’s earnings are still dominated by its resources and energy segments, which contributed around 61% of the total earnings in the first nine months of fiscal 2019. We expect this to decline to below 40% of total net profit by fiscal 2023 given our bearish long-term commodity price forecasts.

For example, our midcycle forecasts in fiscal 2023 are USD 39 per tonne for iron ore, and USD 2.34 per pound for copper (all in nominal terms). These indicate downside of about 15%-54% from current levels.