Sony (6758) – FY16 Q4 Preview Exceeds our Expectations; Our SoTP Updated
Sony found itself in breach of the 10% rule, and so after the market closed on April 21st, it raised its FY16 OP forecast to ¥285bil from ¥240bil. This implies that it made ¥93bil in 4Q OP. That’s not the highest 4Q OP ever, but if you exclude FY12’s asset-sale-driven ¥146bil in OP, then you have to go back to the 1990s, and the heady days of the PS One, Wega TVs and the MiniDisk for a figure that even comes close (¥70bil in FY96). While some of the gains may simply be accounting-related – management mentioned lower amortization costs in the financial division – it looks as though the semiconductor business made a significant contribution, and that all divisions bar devices contributed more than the company had expected in February. Even the troubled film business had a qualified success with Passengers.
Aside from being a reminder that predicting Sony’s quarterly results is akin to water-skiing in the dark (could work out fine but don’t be surprised if it goes horribly wrong), this does augur well for the company’s FY17 performance – and in particular management’s forecast for FY17, when it reports Friday (Apr 28th).The worry, before, was that FY16’s below-normal performance would hand Sony a license to be conservative on its FY17 forecasts. This news changes that. It is hard to see how Sony can forecast less than ¥500bil in FY17 OP on the back of these results. If you add back in the ¥112bil goodwill write-down on the film business, then Sony generated ¥288bil in the 2H FY16 period. 1H FY16 was harmed by the earthquake, but in 1H FY15, the firm generated ¥183bil in OP. So, if just it repeats 1H FY15 performance and 2H FY16 performance, and you add in ~¥30bil in gains from the sale of the Chinese camera module business, then Sony can generate ¥500bil OP target for FY17. In practice, based on this 4Q performance, at least ¥545bil now looks highly achievable in FY17.
This update confirms the three existing business lines that we think should continue to grow through the cycle but also highlights Sony’s future catalyst to the next phase in earnings growth. We have also provided our Sum of the Parts Valuation which implies Sony is currently trading at a 20% discount to fair value.
Sony is engaged in the development, design, production, manufacture, offer and sale of various kinds of electronic equipment, instruments and devices for consumer, professional and industrial markets such as network services, game hardware and software, televisions, audio and video recorders and players, still and video cameras, mobile phones, and semiconductors. Co. is engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs as well as the production and distribution of animation titles. Co. is also engaged in the production, acquisition and distribution of motion pictures and television.
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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