Morningstar | NSSMC’s 3Q FY19 Results in Line; FY19 Guidance Lowered Slightly on Trade War and Operational Issues. See Updated Analyst Note from 07 Feb 2019
Nippon Steel & Sumitomo Metal’s, or NSSMC’s, third-quarter fiscal 2019 (ending March) pretax profit, or EBT (excluding extraordinary items) increased by 50% year over year to JPY 101.7 billion from JPY 67.8 billion during the same period last year and is in line with our expectations. The outperformance is mainly driven by higher EBT from the steel, chemicals and materials and system solutions divisions mitigated by a slight decline in the engineering and construction division. Management attributed the better performance in the steel division due to strong demand, in particularly from the automotive sector, higher steel prices and cost-cutting measures. The stronger performance in the chemicals and materials division is driven by: (1) higher prices for needle coke in a tight supply demand condition; (2) robust sales in epoxy resins used for electronic materials; and (3) strong sales in carbon fiber composite materials used for the civil engineering and construction sectors. Due to the advancement of technology, there is an increase in demand for IT systems and solutions for Internet of Things, artificial intelligence, and other technology which resulted in the improvement in the system solutions division.After factoring in lower shipment volumes due to the operational issues and ongoing trade war concerns, higher raw material prices from our latest commodities price deck along with minor adjustments to our model, we lowered our fair value estimate to JPY 2,300 from JPY 2,370. Our no-moat and stable moat trend ratings on the firm remains intact. In our view, NSSMC’s share price is slightly undervalued, taking into account the long-term overcapacity issues in the steel industry.
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, management lowered the full-year fiscal 2019 EBIT (excluding extraordinary items that are not related to operational activities) guidance to JPY 330 billion (from JPY 350 billion) and net profit guidance to JPY 230 billion (from JPY 240 billion) while keeping its revenue guidance of JPY 6.2 trillion intact. The lower EBIT guidance is mainly caused by a lower EBIT from the steel division as: (1) uncertainties remain due to the ongoing trade war between the U.S. and China; and (2) a decline in shipment caused by operation and equipment related issues as Wakayama Works became unstable nearing the end of its long service life and the firm is in the process of switching from Wakayama blast furnace number 5 to the new blast furnace number 2. That said, management will continue to focus on cost-cutting, inventory management, and production efficiency to improve on the profitability of the company. Management has guided for a full-year dividend per share of JPY 80, representing a dividend payout ratio of 31%, which is in line with its dividend policy of a dividend payout ratio of around 30%.
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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