EUR 850.00 For Business Accounts Only

Morningstar | Toshiba Likely to Get a Lift from Upcoming Reform Plan, our FVE Unchanged at JPY 380

Toshiba plans to announce its new five-year reform plan, "Toshiba Next Plan," by this November, and it will address: 1) assessing remaining business domains; 2) optimizing its fixed cost; and 3) effectively allocating proceeds from the memory business sale, including the share buyback of JPY 700 billion. We think the unfolding strategy details could be a catalyst to lift sentiment surround the company. Otherwise, there was little in the release of its June quarter performance to move the share price. Toshiba's operating income for the June quarter was JPY 0.7 billion, which was 95% lower than the previous year's number of JPY 13.2 billion. However, considering that Toshiba decided to reimburse the bonus of JPY 14 billion to employees, which the company had reduced during its crisis, it is materially flat from the previous year. While the reported numbers seem somewhat weak and it is falling short of its full-year guidance of JPY 70 billion on an annualized basis, we are not concerned, as Toshiba's energy and infrastructure businesses are seasonally strongest in the fourth quarter (quarter-ending March). Overall, reported numbers are within our expectation, which supports our view that after the sale of NAND flash memory in June, Toshiba's remaining businesses are less attractive because of their lower revenue growth and thinner operating margin. We thus will retain our fair value estimate of JPY 380, along with our no-moat rating.

While we think the unveiling of Toshiba Next Plan will help reduce uncertainty and lift sentiment, we are also wary of expecting too much growth expectations from management at this early stage of their reform. We view that the management's primary focus is to improve its profitability and cost structure rather than pursuing revenue growth. For instance, Toshiba mentioned that its order backlog on energy systems & solutions segment decreased 12% from the previous year, as Toshiba has been cautious with project bids, particularly those where risks appeared higher. We currently forecast that Toshiba's operating margin will gradually improve from 1.6% in fiscal 2018 (year ending March 2019) to 3.8% in fiscal 2023. We await details from its new reform plan, to see if higher assumptions are warranted.