Morningstar | Mitsui Fudosan Falls Short on Guidance Achievement Rate but We Expect Strong 4Q
Mitsui Fudosan reported somewhat lackluster results for the October-December quarter, achieving only 63% of its operating profit guidance of JPY 250 billion and net profit guidance of JPY 163 billion for the fiscal year ending March 2019 in the first three quarters. Annualized ROE for the quarter was 6.0%, compared with 7.4% last fiscal year. Although its leasing segment through the third quarter has achieved 78% of guidance for full-year operating profit due to upward revision of rents from existing office buildings in Japan and contributions from the newly opened Tokyo Midtown Hibiya complex, revenue recognition was low in the property sales segment, which reported a small operating loss for the quarter.Still, we expect Mitsui Fudosan will be able to meet its full-year guidance. We believe strong results are likely for the current fiscal fourth quarter considering the seasonality of its property-sales segment and of the Mitsui Home construction business. Also, although the condo market as a whole in Japan is weak, we believe that Mitsui Fudosan’s properties are selling better than many competitors’ because consumers perceive it as offering a top-line product with more central locations and better quality.
Another positive surprise was JPY 7 billion in equity-method earnings during the quarter from its joint ventures in Asia, as new residential complexes opened in Bangkok, Singapore and Jakarta. Given the pipeline of Mitsui Fudosan’s affiliates in Asia, we think such gains can continue, although maybe not at the rate of JPY 7 billion per quarter.
We maintain our no-moat rating on Mitsui Fudosan and raise our fair value estimate from JPY 2,600 to JPY 2,840, 9% above today’s closing price, as we transfer coverage to a new analyst. Our new earnings forecasts are 4% higher than previous forecasts for the fiscal years ending in March 2019 and March 2020 and 8% higher for the year ending in March 2021. We continue to use a cost of equity of 8% for Mitsui Fudosan.
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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