Isuzu (7202) FY16 Outlook: Recovery in Thailand
After years of weak light commercial vehicle (LCV) sales in Thailand, Isuzu’s performance is improving thanks to better general market conditions and on the successful introduction of its updated top selling model, the D-Max. In Japan, sales growth is picking up on the back of solid demand from construction (Olympics related projects, reconstruction, government spending on infrastructure) and logistics. Isuzu’s overseas commercial vehicle (CV) sales should be bottoming out in FY16 (after last year’s contraction), as the Asia macro picture is improving and construction spending is on the rise; offsetting weak demand from the mining sector and oil related projects. While Isuzu is facing the negative impact of the Yen appreciation, with expected forex losses rising, its general sales outlook is better than previously expected, in our view.
We also think that Isuzu’s medium- to long-term outlook is positive: Isuzu’s focus on Asia should eventually pay out, as markets such as Thailand and Indonesia are getting back onto an expansion path, suggesting rising future demand for CVs. Isuzu’s LCV business is only starting to evolve in China and India; and we believe that demand from Japan is not drying out anytime soon, thanks to longer-term infrastructure projects and the rising importance of the logistics sector.
Interest in Isuzu has been rising recently, although concerns over the currency and global macro developments have meant that Isuzu shares have been flat so far this year. In our view, the recovery story in Thailand and Asia, as well as the growth acceleration in Japan, are not fully appreciated by investors yet, as the turnaround story is only just starting to unfold. In our opinion, further indicators for Isuzu’s improved growth prospects should emerge throughout the year. A more favourable sales outlook combined with Isuzu’s more moderate ‘expenses for future growth’, plus consistently high levels of cost savings, should be reflected in higher earnings. Although the currency remains a big negative in FY16, we think that Isuzu’s earnings potential is growing.
Isuzu is attractively valued, trading on an EV/OP of 6.6x for FY16 PSAe and on 6.0x for FY17E. Moreover, the company is becoming more shareholder friendly, now generating a dividend yield of 2.4% and initiating buybacks.
Isuzu Motors is engaged in the manufacture and sale of automobiles. Co. manufactures heavy/medium/light-duty trucks, buses, passenger vehicle engines and industrial-use diesel engines. Co.'s principal products include commercial vehicles including light, medium and heavy-duty trucks and buses; passenger cars including sport utility vehicles and pickup trucks under the name of "Isuzu D-MAX," "Isuzu mu-X" and "Panther;" diesel engines for construction machinery, freezer units and generators; diesel engines for passenger vehicles; and marine engines for commercial boats. In addition, Co.'s subsidiary provides commercial vehicle leasing and maintenance services.
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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