Honda (7267) FY16 Q4 Preview – Focus to be on US Incentives, Financial Services

Key Points

• We expect Honda’s FY16 Q4 results to come in slightly above consensus and above Honda’s own forecast.
• There should be little surprises on the currency, unit sales, production costs and SG&A; however, we believe that there are some uncertainties with regard to incentives, financial services and the model mix.
• We expect the model mix to remain a negative factor in Q4, albeit less so than in the preceding FY16 9mths. Incentives are likely to have risen even further in Q4 compared to FY16 9mths (pro-rata), due to increasingly weak demand for passenger cars in the US.
• As for financial services, Honda is likely to set up provisions for residual value losses for FY17 (as Toyota (7203) has indicated it will, though Honda has been quiet about this so far). We include this possibility in our forecast; otherwise, no provisions or higher than expected provisions could change our OP forecast by as much as ¥20bil either way.
• Markets are likely to react negatively to Honda releasing FY16 OP numbers below ¥800bil, and positively should OP be above ¥820bil.
• As for FY17 forecasts, there could be large discrepancies between Honda’s guidance and consensus, due to potentially widely differing currency assumptions following the recent fast appreciation of the yen. There is a risk of Honda forecasting a profit decline on conservative currency assumptions.
• Investor focus is likely to be on Honda’s FY17 expectations for North American sales and volume / mix contribution (which includes incentives and residual value losses). Since the US situation is currently a major area of concern, a positive outlook from Honda should be well received by markets.
• Honda reports FY16 Q4 earnings on April 28th.