PSA Autos: Honda (7267) – Positive Developments to Support FY17 H2
Honda (7267): Positive Developments to Support FY17 H2
Key Points
- FY17 Q2 results show that Honda’s core operations perform strongly, with consolidated auto sales and motorcycle sales rising and financial services continuing to expand. This is reflected in positive OP contributions from volume / mix, production cost savings and lower SG&A in Q2.
- Excluding negative one-off factors (last year’s change in pension accounting system, litigation settlement), Q2 OP would have risen by 27.5% YoY (excluding currency gains: +17.5% YoY).
- Honda raised its FY17 OP forecast by ¥20bil to ¥745bil, despite the negative impact of the previously not included US litigation settlement of ¥53.7bil, as Honda now predicts higher volume / mix and currency gain contributions.
- Honda’s share buy-back program (up to 24 mil shares for ¥90bil) and a new, more shareholder friendly pay-out policy demonstrates Honda’s confidence in seeing improved operations; this has been well received by investors (shares rose 5.2% the day after earnings were released).
- We expect to see several positive developments in Q3 and Q4: 1) launch of the new Accord in the US should help raising volumes and lower incentives; 2) inventory adjustments completed in the US, with increased supply of the Pilot and Acura MDX and more supply of the 1.5l turbocharged CR-V (currently facing shortages); 3) more room for earnings upgrades on the currency, since Honda works on FY17 H2 average rates of ¥107.5/USD, compared to a current rate of ¥114/USD; 4) improved model mix in Asia with Fit and Brio sales weakening, and Civic, Accord and CR-V expected to increase.
- We are lowering our FY17 OP forecast from ¥830bil to ¥805bil, with the previously not accounted for litigation settlement cost of almost ¥55bil being partly offset by higher than anticipated volume / mix contributions (strong Asian autos, motorcycles, financial services). Based on our estimates, Honda is trading on an FY18e EV/OP of 13.6x and FY18e PER of 9.4x, which we view as attractive levels (historic EV/OP of 15.5x).
Honda Motor is the parent company of a group mainly develop, manufacture and distribute motorcycles, automobiles, power products, and also provide financing for the sale of those products. Principal manufacturing facilities are located in Japan, the United States of America, Canada, Mexico, the United Kingdom, Turkey, China, India, Indonesia, Malaysia, Thailand, Vietnam, Argentina, and Brazil. Co.'s principal business segments are motorcycles, automobiles, financial services, and power products & other business. Co.'s principal automobile products include passenger cars such as "Legend," "Accord," "Inspire," "Civic," "Insight," "City," "Acura RL," "Acura TL," "Acura TSX," and "Acura CSX".
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.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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