Kaneka (4118) - R&D Successes Point to Sustained Earnings Expansion
Kaneka’s shares have significantly underperformed the TOPIX index (by 28%) in 2016. A large part of that is attributable to a somewhat puzzling negative reaction to its FY15 Q3 announcement. However, management maintains its FY16 guidance, which calls for 9.9% OP growth. Both consensus and our own estimates (OP -10%) recognize the risk of a downward revision this year, principally because of the stronger yen. Kaneka will be in good company should earnings weaken in FY16. We view its underlying earnings recovery as still intact. OP bounced back by nearly three times in the four years from FY11 to FY15. We expect a return to double-digit OP growth once more in FY17 and FY18.
Key Points
- We expect growth in chemical segments to be driven by a shift to new and higher value-added products such as specialty PVCs and new resin modifiers, along with global market expansion. Expandable plastics stand to benefit from firming housing market with low interest rates.
- The Life Sciences strategy includes expansion into gastrointestinal devices and growing sales of generics and biopharma manufacturing. Foodstuffs have begun to benefit from sales company improvements.
- The Electronics segment should steadily improve on material product upgrades, along with broadening sales routes for its newest solar cells.
- FY16e PER is 11.1x on official guidance, but we estimate 15.0x. The PER declines to 11.0x on our FY18 estimates. For FY16, we estimate a PBR of 0.86x and EV/OP of 9.7x. The current yield is 2.3%, but we estimate that Kaneka can hike its dividend from ¥18 to ¥26 by FY20.
Kaneka is engaged in the manufacture and sale of chemicals and plastic products. Co. operates in seven business segments: chemicals, functional plastics, expandable plastics & products, foodstuffs products, life science products, electronic products and synthetic fibers and others. Co.'s principal products include caustic soda, chloride compounds, polyvinyl chloride and chlorinated PVC; modifiers, liquid polymers and engineering plastic compounds; extruded polystyrene foam boards and polyolefin foams; margarine, shortening and bakery yeast; blood purification systems, pharmaceutical intermediates and functional foods; polyimide films and photovoltaic modules; and modacrylic fibers.
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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