Sumitomo Chemical (4005) – Heading Back Toward Peak Profits
Sumitomo Chemical may be considered a prime core holding candidate in the chemical sector. Its shift from bulk to fine chemicals, the development of new battery and electronic materials, and growth strategies in agrochemicals should support peak profits and cash flow through FY20.
We estimate that OP will drop by 64% in FY19 at subsidiary Sumitomo Dainippon Pharma (SDP, 4506) when antipsychotic drug Latuda goes off patent. We expect this event to lower Sumitomo Chemical’s OP by 11.1%, but NP by only 3.0%. For details on SDP’s strategy, please see our detailed April 12, 2017 report, ‘SDP (4506) – Engineering a Recovery, Never as Easy as Falling off a Cliff’.
Key Points
- OLED sales may soon exceed those for LCDs. Sumitomo is focusing on film touch sensors, window film and light-emitting polymers.
- LiB separator sales growth should accelerate in FY17 as Tesla (TSLA US) ramps up production of its Model 3 car. Sumitomo is working as well to develop LiB cathode materials.
- Comparable to SDP’s “post-Latuda” strategy, Sumitomo’s growth initiatives for agrochemicals include global expansion, new product development, and increased capacity for livestock feed additives.
- As part of its global shift to higher value-added chemicals, affiliate Petro Rabigh plans to commence Part 2 operations during 2017.
- Valuations appear relatively modest. We estimate that the shares are trading on a FY17e PER of 10.4x, EV/OP of 10.5x and PBR of 1.2x, with an ROE of 12.2%. A dividend hike from ¥14 to ¥22 by FY20 strikes us as plausible.
Sumitomo Chemical is a chemical manufacturing company. Co.'s business is comprised of 5 sectors: Petrochemicals & Plastics Sector, Energy & Functional Materials Sector, IT-related Chemicals Sector, Health & Crop Sciences Sector, Pharmaceuticals Sector and Others. Co. is engaged in the manufacture and sale of inorganic and organic chemicals, synthetic fiber materials, metal acrylate, alumina and aluminum products, petrochemical, synthetic resin and rubber products, optical goods, color filters, materials for semiconductors, electronic materials, agrochemicals, fertilizers, agricultural materials, pesticide, dietary additives, pharmaceuticals and radioactive diagnostic products.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
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