EUR 850.00 For Business Accounts Only

Morningstar | Mitsui’s Fiscal 2019 Earnings Trail Expectations Because of One-Off Event; Shares Overvalued

Mitsui, one of Japan's oldest and largest general trading companies, has grown into a global conglomerate with diversified operations in trading, energy, mineral and metal resources, infrastructure, agricultural production, chemicals, and healthcare.In recognition of the burgeoning emerging-markets appetite for natural resources, Mitsui is determined to secure a stable supply of commodities and energy for the export-oriented Japanese economy. Aided by low-cost funding and impressive market-timing, Mitsui has been able to build its energy and mining businesses with best-in-class assets. Although Mitsui's energy and mining businesses currently account for less than 40% of total assets, these segments consistently generated more than 80% of total earnings on average during fiscal 2010-14. However, the tide has turned with the end of the commodity bull cycle and the drop in commodity prices. In fiscal 2019, contribution from these segments fell to 63% of total earnings, and we expect the ratio to fall below 40% by the end of our explicit forecast period because of slower growth in China, the world's largest consumer of most commodities.We think Mitsui needs to devote its capital to achieve diversification from its natural resource segments. In the past, Mitsui has established a formidable marketing and trading network around the world, but low switching costs and lack of bargaining power have resulted in razor-thin returns for its nonresource businesses. These businesses face a very different set of problems, yet the firm has limited know-how and insufficient experienced managers to meet these challenges. This has constrained the returns on these investments, in our opinion. We believe that the company’s investments in companies such as IHH Healthcare (Asia's largest private hospital group) and SLC Agricola (a Brazil-based agriculture producer) are the right move to capture the long-term secular trend of a growing and ageing population. However, more needs to be done to see meaningful results, given the sheer size of the firm.