Morningstar | As Rival Announces Unexpected Large Buyback, Mitsui Fudosan Still Focused on Growth. See Updated Analyst Note from 14 May 2019
We raise our fair value estimate on Mitsui Fudosan from JPY 2,840 to JPY 3,000 (19% above its share price) as we roll forward our model to incorporate its in line results for the year ended March 2019 reported May 10.On May 14, Mitsui Fudosan held a results meeting where management answered analyst questions. We think the discussions about the company’s target financial leverage and governance are particularly relevant after its rival Mitsubishi Estate announced on May 14 an unexpectedly large share buyback and improvements to corporate governance including removal of its long-standing takeover defense measures.
Like Mitsubishi Estate, we think Mitsui Fudosan could afford to take on more financial leverage. Its debt-to-equity ratio is 1.8 times based on the book value of its properties, but only 1.0 based on its market value of properties assuming a 30% tax rate on unrealized gains. Mitsui Fudosan’s ROE of 7.4% for the just-ended year trails Mitsubishi Estate’s 7.8% and Sumitomo Realty’s 11.3% even though its ROA of 2.6% is higher. The ranking is similar if we include unrealized gains in the denominators, with Mitsui Fudosan achieving the best return on its assets but falling short once leverage is considered. This partly reflects Mitsui Fudosan’s decision five years ago to undertake a secondary offering of shares resulting in 12.5% dilution in order to invest heavily both in Tokyo (particularly Nihonbashi and Hibiya areas adjacent to Mitsubishi Estate’s Marunouchi stronghold) and overseas (including Hudson Yards in New York City).
When asked at the meeting, Mitsui Fudosan management said they do not intend to raise ROE by adjusting up financial leverage, but rather entirely by increasing ROA further. In our view, Mitsui Fudosan is probably content to maintain its current level of ROA as long as its absolute amount of net profit is rising strongly on the back of new investment, but it will need to increase shareholder-return efficiency when growth slows.
Mitsui Fudosan is a real estate group based in Japan. Co.'s operations are organized along five segments: Leasing (leases office buildings, commercial facilities and housing); Property Sales (distributes housing and commercial facilities); Management (provision of management, maintenance and cleaning services, outsourcing services for rental housing and consultation services, parking lots, housing trading and leasing businesses, operation of private placement real estate funds, and the real-estate investment trust asset management business); Mitsui Home (construction of housing, offices and facilities); and Others (operates hotels, restaurants, golf courses and resort facilities).
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