Showa Denko (4004): FY17 Revision – Good News Was Already Known, Bad News is New
Key Points
- Showa Denko’s (SDK) July 24th earnings revision represents, for all intents and purposes, its FY17 H1 announcement. The actual announcement is scheduled for August 8th. SDK revised up OP guidance, but unfortunately lowered RP and NP guidance because of difficulties at affiliate Indonesia Chemical Alumina (ICA).
- Consensus estimates for SDK’s OP have been rising for a year now. Petrochemicals have remained resilient and electronics firmed just as management cut costs in its HD media business. SDK has revised up FY17 OP guidance for Electronics by ¥3.5bn, Petrochemicals by ¥1.5bn and Inorganic Materials by ¥1.0bn. SDK did not provide a detailed H1 revision. See overleaf for details.
- We think that SDK has been trying – with only limited success – to boost volumes at ICA, but that the company has been experiencing annual losses of several billion yen. SDK owns 20% and now intends to implement an exit strategy. In Q2, SDK will book related losses, which will affect RP by about ¥10bn, in addition to extraordinary losses of about ¥6.7bn.
The speed of SDK’s business recovery over this last year has been impressive. On top of that, more than one broker commented recently on an upswing in graphite electrode markets. - However, SDK’s upward revision falls short of OP consensus of ¥62bn, which may cause some disappointment. Perhaps more important, the revision is also a reminder that, with such a diverse business portfolio, things can and often do go wrong.
- Moreover, valuations are no longer undemanding. We estimate a FY17 PER of 22x, PBR of 1.4x and EV/OP of 12.6x.
Showa Denko is a chemical producer. Along with its affiliates Co. is mainly engaged in the manufacture and sale of petrochemicals, chemicals, electronics, inorganic materials and aluminum. Co.'s principal products include olefin, such as ethylene and propylene, as well as polyethylene and plastic products; industrial gases, including oxygen, nitrogen, argon and hydrogen gas; hard discs, compound semiconductors, rare earth magnetic alloys, and materials for lithium-ion battery; ceramics, such as alumina, abrasives and refractories; and carbons, such as graphite electrodes; ingots, sheets, extruded products, foils, beverage cans, building products and others.
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