Honda: R&D In EV Initiatives, Expecting Recovery In 2024, And Very Cheap

seekingalpha2023-12-28

Honda's recent lower revenue is offset by beneficial deals in the EV industry and R&D efforts in the growing EV sector.Expectations for 2024 include single-digit revenue increases and improved ...

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Muhammad Labib Adilah/iStock Editorial via Getty Images Honda Motor Co., Ltd. (NYSE:HMC) recently delivered lower revenue than expected, however, management noted beneficial deals with large players in the EV industry. Besides, recent R&D efforts that include new Electrification Business Development Operations could bring significant business growth from the growing EV sector. Additionally, with Honda expecting recovery of production volume in North America and beneficial revisions of net sales, we could see further improvement in the demand for the stock in 2024. I did see several risks from the total amount of debt, changes in the support to the EV sector, or lower energy prices. However, HMC is currently trading at multi-year lows. Business Model, Geographic Diversification, And Expectations For 2024 Honda’s business segments include motorcycle business operations, automobile business operations, financial services business operations, and power products. Honda Motor is way more popular in Japan and other parts of Asia than in the United States and Europe. Investors living outside Asia may want to have a look at the table below. Investors looking to get exposure to markets in Japan may be happy for owning Honda shares.   Source: Quarterly Report With that about the geographic distribution of Honda’s revenue, I believe that the most relevant right now is having a look at the expectations given for 2024. In the last quarter, management noted lower than expected net revenue of close to JPY32.93 billion. The company appears to have gone through a very difficult environment in China and Asia. However, the new 2024 forecasts indicate favorable currency effects, recovery of production volume in North America, and beneficial revisions of net sales, operating profit, and net profit.   Source: SA  Source: Quarterly Presentation According to the last presentation given to the investors, Honda expects single-digit increases in revenue for the first half of 2024. Operating profit is also expected to increase to close to 7.2%, a bit better than that in the same period in 2023.   Source: Quarterly Presentation With regard to the current valuation, I believe that we are making a financial assessment at an appropriate moment for buyers. In the past, Honda reported a series of detrimental earnings, which seemed to disappoint market participants. Honda is currently trading at a valuation that is lower than levels seen in 2014.   Source: SA  Source: SA Healthy Balance Sheet, And Declining Total Amount Of Debt As of September 30, 2023, the company reported cash and cash equivalents worth JPY4440 billion, with trade receivables of about JPY1080 billion, receivables from financial services worth JPY2245 billion, and inventories of JPY2355 billion. Total current assets were equal to JPY10698 billion, and the current ratio is larger than 2x, so I would say that Honda does not report liquidity issues. Long-term assets include receivables from financial services of close to JPY5075 billion, other financial assets worth JPY964 billion, equipment on operating leases of close to JPY5069 billion, and property, plant, and equipment worth JPY3229 billion. Besides, with intangible assets of about JPY922 billion and deferred tax assets worth JPY125 billion, total assets stood at JPY27676 billion.   Source: Quarterly Report I am not really concerned about the total amount of debt because Honda offers stable FCF generation and is a solid and well-known brand. With that, investors may want to know that the financial debt/EBITDA stands at close to 4x. It did lower as compared to the level reported in 2021. However, I believe that further reduction in the leverage could be beneficial for the EV/FCF multiple.   Source: YCharts In particular, Honda Motor reported trade payables worth JPY1433191 billion, financing liabilities worth JPY3755650 billion, accrued expenses of about JPY450583 billion, and provisions worth JPY440982 billion. Total current liabilities stand at about JPY7390850 billion. Long-term financing liabilities stand at close to JPY5254792 billion. With provisions of close to JPY298826 billion and deferred tax liabilities worth JPY947149 billion, total liabilities are equal to JPY14998630 billion. The asset/liability ratio is larger than 2x, so I think that Honda reports a stable financial situation.   Source: Quarterly Report Given the total amount of debt, I studied carefully the weighted average interest rate, which stood at close to 4.29% in 2023. With this figure in mind, I believe that a WACC of around 5% and 11% would make sense.   Source: Quarterly Report Electrification Efforts Could Bring Demand For The Stock I believe that Honda will most likely receive attention from market participants thanks to its electrification efforts and new agreements with large automobile conglomerates. Among the new initiatives is the creation of ChargeScape, a new EV grid services company. Besides, there is the MoU signed with Mitsubishi (OTCPK:MSBHF) to create new EV-related business models.   Source: Quarterly Presentation Honda Motor will most likely enjoy net sales growth increases thanks to the growth of the APAC EV market. According to experts in market assessment, the APAC Asia EV market is expected to grow at close to 19% CAGR from now to 2027. APAC Electric Vehicle market is likely to reach USD 777.62 Billion in 2027, at a CAGR of 19.10%. Source: APAC Asia Electric Vehicle Market Size & Share Analysis Research And Development Efforts Include The Creation Of The Electrification Business Development Operations Honda appears to be quite serious about the new developments in the EV industry. Management appears to be creating a specific unit, namely Electrification Business Development Operations, for leveraging mobility products and services in this sector. The business decision is quite smart. If Honda decides to sell this individual business unit in a spin-off corporate operation, I believe that the combined business entity could be worth much more. The following is information about the Electrification Business Development Operations. The Company has created the Electrification Business Development Operations based on the Business Development Operations, to further strengthen and accelerate Honda’s electrification business. This operation consolidates the business strategy and electric vehicle product development functions of Automobile business and electrification-related strategy and development functions of Motorcycle business and Power products business, and Honda will strive to further accelerate its electrification business and create new value by leveraging its broad and expanding range of mobility products and services. Source: Quarterly Report Modification Of The Stock Repurchase Program Includes The Acquisition Of Up To 3.8% Of The Total Share Count In the last quarterly report, Honda noted that a recent modification with regard to the stock repurchase program included the potential acquisition of up to 3.8% of the total amount of shares outstanding. I believe that further reduction in the share count could lead to stock price improvements.   Source: Quarterly Report I believe that the reduction in the share count that took place from the year 2020 is meaningful. As a result, we may see stock price increases sooner or later.   Source: YCharts Beneficial Expectations From Other Investment Analysts, And Cheap Trading Multiples Given the beneficial expectations of other analysts, I believe that readers may want to have a look. They are not expecting significant net sales growth, however operating margin is expected to increase, and FCF is expected to remain at close to $1.4-$1.42 billion. In particular, market estimates include 2026 net sales of JPY21261 billion, with 2026 EBITDA of JPY2025 billion, 2026 EBIT close to JPY1410 billion, and net income of about JPY1101 billion.   Source: S&P Given the previous expectations, I do not really see why Honda trades at the current trading multiples. We are talking about a large corporation with a reasonable amount of debt and FCF growth. Honda currently trades at 0.5x sales, 5.35x EBITDA, and 7x FCF. With these figures, I believe that assuming an exit multiple between 4x and 7x makes sense.   Source: S&P My DCF Model And Valuation Taking into Account Previous Assumptions And Previous Financial Figures My cash flow model includes 2029 profit before income taxes of close to JPY618 billion, depreciation and amortization of about JPY1069 billion, and share of profit of investments accounted for using the equity method of about -JPY40 billion. Additionally, with finance income and finance costs worth -JPY326 billion, interest income close to -JPY162 billion, and trade receivables of -JPY333 billion, I also included changes in inventories of -JPY748 billion. Moreover, if we assume 2029 trade payables of JPY165 billion, accrued expenses close to JPY354 billion, and provisions and retirement benefit liabilities of -JPY17 billion, 2029 CFO would be close to JPY2881 billion. Also, with 2029 payments for additions to property, plant, and equipment of -JPY1062 billion, 2029 FCF would be JPY1819 billion.   Source: Oren's Cash Flow With the previous results, FCF ranging from JPY1.7 billion to JPY1.8 billion, a conservative WACC of 5%-11%, and FCF multiple of 4x-7x, the implied valuation without debt would be close to JPY7.9 billion and JPY15 billion with a median of about JPY9 and JPY12 billion. Note that peers out there are trading at much more than 4x-7x EBITDA. I believe that my exit multiple is quite conservative.   Source: SA Besides, by dividing by the share count, the median implied price forecast would not be far from JPY2,001 or JPY2,501. Note that the maximum price forecast obtained is close to JPY3,095.   Source: Oren's DCF Model With the previous results, the internal rate of return obtained in my DCF model would include a median figure close to 8% and 15% and a maximum IRR of 22%.   Source: Oren's DCF Model Risks I am not concerned about the total amount of debt. However, increases in interest rates could bring certain difficulties to refinance the balance sheet. As a result, the cost of debt could increase, which may enhance the cost of capital, and lead to lower fair valuation. In addition, under this detrimental case scenario, Honda may see a decrease in its EV/FCF, and the FCF margins could also be lower. Honda Motor could suffer significantly from cyber-attacks as IoT and information systems are a critical part for controlling products. As a result, if management needs to release information about a successful attack to clients, Honda could see brand erosion, some partners may leave the company, and net income could fall. In this regard, the company offered the following lines. Especially, IoT and other information technologies have become indispensable for control of products. The means of cyber-attacks that take place have become more advanced and sophisticated, targeting organizations around the world. Moreover, any cyber-attacks could significantly affect Honda’s initiatives for company-wide strategies, which are zero impact on the global environment, zero traffic collision fatalities, and creating new value. Source: 20-F Considering that Honda is betting heavily on the success of the EV market, I believe that lower support from governments or changes in environmental regulation could harm business growth. Additionally, if clients are reluctant to adopt their purchasing behavior to the new EV revolution, I believe that we may see lower net sales than expected. My Conclusion  Honda Motor recently delivered lower-than-expected net sales. However, I believe that the recent efforts in the EV sectors and the creation of the Electrification Business Development Operations could bring significant net sales growth. Management also gave a beneficial forecast for 2024 including beneficial currency effects, recovery of production volume in North America, and beneficial revisions of net sales. With beneficial forecasts for 2025 and 2026 by other analysts, I also believe that there is significant potential for future business growth. I do see risks with regard to the total amount of debt and changes in the public policy about environmental efforts, however, Honda appears very cheap.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2394479474"}