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Morningstar | Mitsui’s Fiscal 2019 Earnings Trail Expectations Due to One-Off Event; Shares Remain Overvalued

We continue to see no-moat Mitsui as overvalued following the fiscal year ended March's net profit of JPY 414 billion, which was down 1% year over year. Stripping out a one-off loss of JPY 20.6 billion due to the fire at Intercontinental Terminals Company in March, results were largely within our expectations. Earnings from its metal resources segment were down 35%, but this was due to the absence of a valuation gain that had lifted fiscal 2018 earnings. Mitsui otherwise got a boost from the energy business on higher oil prices and the lifestyle division on the reversal of provisions for multigrain and contributions from its new fashion and textile businesses. After adjusting our commodity price assumptions and fine-tuning our earnings forecasts, our fair value estimate is unchanged at JPY 1,530.

Mitsui’s earnings are highly correlated with commodity prices, with its resources and energy segments contributing more than 60% of fiscal 2019 net profit. While we expect this to remain in the near term, we are more bearish in the long term and we expect contribution from the energy and mining businesses to fall below 40% of total earnings by the end of our explicit five-year forecast due to our "lower for longer" commodity price assumptions. For example, our midcycle key price forecasts are $41 per metric ton for iron ore, $2.39 per pound for copper and $55 per barrel for WTI crude oil. These indicate a downside of about 13%-56% from current levels.

Mitsui’s net gearing ratio has increased to 0.86 times from 0.78 times a year ago, largely due to rising merger and acquisitions, especially in nonresources businesses. In particular, the firm has increased investment in IHH Healthcare, one of Asia’s largest private hospital groups, and has become its largest shareholder with about a 33% stake. That said, Mitsui’s resources and energy segments still dominate its earnings.

The company also guided that the dividend will be unchanged at JPY 80 per share in fiscal 2020, or a payout ratio of about 30%, translating to a decent yield of more than 4%.