Morningstar | NSSMC's 1Q Fiscal 2019 Results Largely in Line; Fiscal 2019 Guidance Above Expectations. See Updated Analyst Note from 03 Aug 2018
Nippon Steel & Sumitomo Metal's, or NSSMC's first-quarter fiscal 2019 (ending March) pretax profit, or EBT (excluding extraordinary items) decreased by 18.8% year over year to JPY 87.7 billion from JPY 108 billion during the same period last year and is largely in line with our expectations. This was mainly driven by lower EBT from the steel division which was partly mitigated by improvements in all the other divisions. Despite the higher steel prices seen during first-quarter fiscal 2019, the company recorded lower EBT due to inventory write-down and higher costs. However, it is worth noting that management is guiding for an improvement in EBT for the steel division for fiscal 2019 to JPY 300 billion from JPY 245.7 billion in fiscal 2018 as steel demand is expected to remain strong, particularly for the automotive and industrial machinery sectors in Japan and management continue to focus on cost-cutting. Management also expects to declare an interim dividend of JPY 40 per share during its first-half result, which is an increase from JPY 30 per share in first-half fiscal 2018. We maintain our fair value estimate of JPY 2,510, our no-moat and stable moat trend ratings on the firm. In our view, there will be limited upside for NSSMC's share price in the near term due to concerns of a trade war between the U.S. and China.Management provided guidance for its first-half and full-year fiscal 2019 results. For first-half fiscal 2019, management expects to generate EBT (excluding extraordinary items) of JPY 150 billion, which is similar to the same period last year. However, net profit is guided to be around JPY 130 billion (compared with JPY 99 billion in first-half fiscal 2018) on some extraordinary gains mainly from the sales of investment securities and lower tax expense as management is making changes to its accounting methods this fiscal year. Management expects to adopt the IFRS accounting standard for its full-year fiscal 2019 results (which is a transition from its Japan GAAP now). Based on IFRS standards, for full-year fiscal 2019, management is expecting to generate EBIT (excluding extraordinary items that are not related to operational activities) of JPY 350 billion and net profit of JPY 240 billion (from 195 billion in fiscal 2018).
As part of NSSMC's strategy to continue to expand in the high-grade steel segment, the company announced earlier in March 2018 that it is looking at ways to make its 15.3% owned Sanyo Special Steel a subsidiary of the company. NSSMC now announced that it is injecting its newly acquired Ovako, a special steel producer in Europe into Sanyo Special Steel, resulting in it holding a 51.5% stake in Sanyo Special Steel, which in turns makes it a subsidiary of the company. As a result, Sanyo Special Steel is expected to generate more than JPY 5 billion of synergies while at the NSSMC group level, management expects to generate synergies of around JPY 10 billion. This deal is expected to be completed by end of March 2019. We view this as the right strategy for the company to improve its profitability over the long term.
Nippon Steel & Sumitomo Metal and its affiliates are mainly engaged in the manufacture and sale of steel products, chemicals and nonferrous metals. Co. is also involved in the engineering and construction works; the manufacture and sale of semiconductor components and materials, electronic components and materials, metal-processed products, and ceramic components and materials; the manufacture and sale of chemicals products, coke and coal tar chemicals products and electronic materials; and the provision of engineering and consulting services pertaining to computer systems.
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