ORIX: Consider Capital Recycling Plans And Peer Valuation Discount

seekingalpha04-27

ORIX Corporation is rated as a Buy, as its P/B is lower than its peers and the company has the potential to increase its ROE through capital recycling initiatives.ORIX Corporation recently announced ...

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Earlier, I analyzed ORIX Corporation's most recent third quarter financial results, and drew attention to its ROE target in my February 8, 2024 write-up. This update focuses on IX's recent capital recycling move and a comparison of the stock's valuation with peers. I stay bullish on ORIX Corporation, as its current valuations aren't reflective of the potential improvement in the company's ROE driven by capital recycling initiatives. Capital Recycling Last month, ORIX Corporation issued a 6-K filing disclosing that it planned to \"transfer a part of its shares in ORIX Credit Corporation, a consolidated subsidiary of ORIX, to NTT DOCOMO, and to make ORIX Credit a joint venture.\" In this 6-K filing, ORIX Credit is described as a company \"engaged in the consumer finance, credit guarantee, and mortgage banking businesses.\" In specific terms, ORIX Corporation is proposing to sell a 66% equity interest in ORIX Credit for an expected gain of JPY57 billion. This transaction was scheduled to be concluded by the end of March 2024. On March 29, 2024, IX revealed that the former Chairperson of ORIX Credit Corporation has been redesignated as the Chairperson of ORIX Asset Management. This suggests that the reduction of ORIX Corporation's stake in ORIX Credit should have been completed as per the company's earlier plans. ORIX's Historical Investment Gains By Business Segment ORIX's Q3 FY 2024 Results Presentation SlidesIX's Capital Recycling Plan ORIX Corporation's Q3 FY 2024 Results Presentation SlidesAs per the two charts presented above, IX has a good track record of monetizing assets to deliver investment gains. In the first half of fiscal 2024 (April 1, 2023 to September 30, 2023), ORIX had already realized investment gains amounting to JPY23.6 billion, and it aims to achieve between JPY100 billion and JPY150 billion of investment gains between 2H FY 2024 and end-FY 2025. The recent ORIX Credit stake reduction transaction, which contributed an investment gain of JPY57 billion, will play a part in helping IX to meet its JPY100-150 billion investment gains goal. On the other hand, the company has made good progress with respect to capital recycling, having invested JPY500 billion in new assets and businesses in 1H FY 2024. Going forward, IX has the potential to make another JPY550 billion of new investments for the time frame between October 1, 2023 and March 31, 2025 taking into account its deal pipeline. With my prior February 8, 2024 article, I highlighted that \"ORIX Corporation aims to increase its ROE from 8.0% in 9M FY 2024 to 9.0% and 10.4% for full-year FY 2024 and FY 2025.\" An assessment of IX's capital recycling moves and targets gives me greater confidence that the company's ROE targets are achievable. Peer Valuations The market values ORIX Corporation at a huge discount to the company's peers based on the P/B valuation metric, as highlighted in the peer comparison table presented below. Peer Valuation Comparison For ORIX Corporation   Stock Trailing P/B Valuation Multiple Consensus Current Fiscal Year ROE Forecast   ORIX Corporation 1.0 9.2% (versus the company's guidance of 9.0%)   Macquarie Group Limited [MQG:AU] (OTCPK:MCQEF) (OTCPK:MQBKY) 2.1 11.0%   KKR & Co. Inc. (KKR) 3.8 16.4%   Click to enlarge Source: S&P Capital IQ IX's current undervaluation is justified by its relatively lower ROE vis-a-vis its peers. Assuming that ORIX Corporation's future ROE continues to improve with its ongoing capital recycling initiatives, IX's valuation gap with peers is likely to narrow over time. ORIX Corporation's 10-year historical mean P/B ratio is 2.1 times (source: S&P Capital IQ), or the same as what its peer Macquarie Group is currently trading at. If IX's future ROE rises to the low teens percentage level closer to Macquarie Group's ROE in time to come, it is reasonable for ORIX Corporation to command a P/B multiple of at least 1.5 times, which will still represent a 30% valuation discount as compared to Macquarie Group. FY 2024 Results Preview May 8, 2024 is the expected date of ORIX Corporation's full-year fiscal 2024 financial results release. The sell side analysts' consensus FY 2024 net profit estimate for IX is JPY329.3 billion as per S&P Capital IQ data. This is largely in line with the company's full-year bottom line guidance of JPY330 billion outlined in its 9M FY 2024 earnings presentation. Both the analysts and the company management are projecting a +50% increase in ORIX Corporation's earnings for the latest fiscal year. As outlined in its 9M FY 2024 earnings presentation, an important driver of management's FY 2024 net income growth guidance is \"investment gains.\" In the company's March 2024 6-K filing announcing the ORIX Credit stake reduction deal, IX noted that the JPY57 billion investment gain relating to this transaction was incorporated into its JPY330 billion FY 2024 earnings guidance. This means that it is more likely that ORIX Corporation's actual FY 2024 bottom line can meet the market's expectations, as a key component of the company's earnings guidance has already been realized. As such, my opinion is that IX's FY 2024 results will be largely in line with what the analysts had anticipated. Variant View While I have a bullish view of ORIX Corporation, there are certain scenarios which could see the company's shares underperforming. One thing to note is that IX's actual pace of capital recycling will affect its future earnings and ROE. If ORIX Corporation recycles capital at a slower-than-expected pace, the company's actual ROE and bottom line might disappoint investors. Another thing to note is that the success of ORIX Corporation's capital recycling efforts is dependent on the company's judgment regarding valuations. If IX buys assets at inflated valuations and divests businesses at below-market valuations, this would be value-destructive. Closing Thoughts  ORIX Corporation is currently trading at a significant discount to the company's listed peers due to an inferior ROE. As the company continues to execute on its capital recycling plans, its ROE is likely to increase going forward. This justifies a higher P/B multiple for IX in time to come.","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/2430788135"}