Honda (7267) FY17 Outlook – Relative Position to Improve under Challenging Market Conditions

Key Points 

• Honda produced strong results in FY16; partly due to the reversal of Takata (7312)-related recall expenses, but also on high production cost savings and positive volume contributions.  
• Honda’s FY17 guidance was below market consensus, on the back of cautious currency assumptions, expectations for sharply rising raw material prices, and deteriorating sales conditions in the US. 
• Although we agree that the market environment is becoming more challenging for automakers in general, we think that Honda’s relative position is improving. This is due to: its strong light truck model line-up; its increasing potential for production cost savings; its being less vulnerable to deteriorating conditions in the US financial services market than most competitors; its declining capex and capex related costs, with capex having peaked two years ago; and its successful strengthening of its Asian operations, both for autos and for motorcycles, improving the diversification potential. 
• However, we are more concerned about financial services in the US than are automakers and perhaps consensus. We include this downside potential in our earnings forecast for Honda. However, as our view on sales and production cost savings is more optimistic than Honda’s, our (currency-adjusted) forecast still lies above Honda’s. 
• After a strong run following the US election (Honda shares up 31% from 9th of November to 15th March), Honda shares weakened from mid-March on, due to doubts over the positive ‘Trump’ effect, and a stronger Yen; Honda shares then came under pressure following the earnings release, as Honda set the scene for a difficult year. 
• Since markets are now aware of the US sales situation, we believe that the risk of further negative triggers is small. With a dividend yield of 3.1%, a PB below 0.8x and an EV/OP (FY18E) of 12.2x, we find that Honda is attractively valued.