Morningstar | No Major Surprise in Mitsui's 1Q Earnings; FVE Increased Slightly to JPY 1,460; Shares Overvalued. See Updated Analyst Note from 02 Aug 2018
Mitsui's first-quarter fiscal 2019 (ending March) results announcement does little to alter our view, and we raise our fair value estimate slightly to JPY 1,460 from JPY 1,430 to take into account the time value of money. We still consider the shares as overvalued, as our below-consensus midcycle commodity price assumptions will weigh on Mitsui's long-term profitability.The firm's net profit rose 7% year over year to JPY 118 billion, helped by better performance of lifestyle (aided by a gain of JPY 11.6 billion on reversal of provision from Multigrain) and innovation & corporate development (recognized a gain of JPY 5.6 billion due to valuation and sales of shares in Mercari, Inc.) segments, partly mitigated by lower earnings from mineral & metal resources (lower contributions from iron ore and coal mining operations, deconsolidation of Valepar S.A., and absence of impairment loss reversal at a Chilean copper mine) division. While this accounted for about 28% of our full-year forecast, we expect weaker earnings ahead in absence of the one-off gains and leave our forecast largely unchanged.
Mitsui continues to grow its nonresources businesses by investing in agricultural and food manufacturing, transportation, and automobile operating lease and rental car businesses in the first quarter. However, the firm's earnings remain highly correlated with commodity prices, and its resources and energy segments contributed about 48% of the total net profit for the quarter.
We are bearish and expect contribution from the energy and mining businesses to fall below 40% of total earnings by the end of our explicit forecast due to our "lower for longer" price assumptions. For example, our midcycle key commodity price forecasts are USD 35 per tonne for iron ore, USD 80 per tonne for metallurgical coking coal, USD 50 per tonne for thermal coal, USD 2.00 per pound for copper, and USD 55 per barrel for WTI crude oil (all 2015 dollars, inflated at 2.25% per year).
These indicate downside of about 20%-59% from current levels.
Mitsui & Co. is a general trading company engaged in a range of global business activities including worldwide trading of various commodities, arranging financing for customers and suppliers in connection with Co.'s trading activities, organizing and coordinating industrial projects, participating in financing and investing arrangements, assisting in the procurement of raw materials and equipment, providing new technologies and processes for manufacturing, and coordinating transportation and marketing of finished goods. Americas, Europe, the Middle East and Africa, and Asia Pacific trade in various commodities and conduct related business led by overseas trading subsidiaries in each region.
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