EUR 850.00 For Business Accounts Only

Morningstar | Strong Property Sales Lift Mitsui Fudosan's 1Q Result

Mitsui Fudosan reported first-quarter results in line with our expectation. Revenue and operating profit were up 16% and 8% year over year, respectively. The main driver of growth was strong property sales with revenue and operating profit up 41% and 36%, respectively, driven by rising average selling prices. For leasing, the largest earnings contributor, top line grew 7%, but earnings fell 3% on margin compression. The weakness is reflected in rising vacancy rates across the company’s office and retail assets during the quarter. For fiscal 2018, the firm is guiding for a 7% top line growth, but a modest operating income growth of 2%, along with flat net profit. With the outperformance of the property sales segment offset by the weakness of the leasing segment, we reaffirm our fair value estimate of JPY 2,600, representing 1.2 times our forward book value estimate, together with our no-moat rating with stable outlook for the firm.

For the property sales segment, total units sold domestically declined by 12%, yet revenue was 35% higher due to higher selling prices and larger units across major cities. Margin also expanded as costs remained constant, resulting in operating profit being up 67% year on year. For overseas projects, top line grew more than 50%, but with falling profit. The muted overseas results were not large enough to affect the performance of the entire segment. The company guidance for the segment is relatively conservative with mid-single-digit growth in revenue and earnings. The company’s leasing segment showed weak results for the quarter. Vacancy rates increased 30 to 50 basis points since end of last fiscal year in March 2018. The company guided a top line growth of 8% and flat earnings for the year, slightly ahead of the first quarter run rate.

Office vacancy rate in Tokyo metro continue to trend downward since the peak in 2012. The strong uptake was supported by in-migration and lower than average supply during those years. However, office supplies are expected to tick higher to above long-term trend of 1.02 million square feet over the next three years, averaging 1.38 million square meters per year, capping the lease rate for the company’s Tokyo portfolio in the medium term. On the property sales side, in the metro Tokyo market, new unit launches are expected to be stable at 38,000 units in 2018, in line with the average of the past five years. Inventory also remains flat near 7000 units. However, price growth has been strong since 2012, riding on the back of growing demand but flat supplies. We expect this trend to be unchanged in the near term.