Mitsubishi Corporation: Watch Asset Sales And Capital Return

seekingalpha09-24

I rate Mitsubishi Corporation as a Buy due to the potential earnings boost from asset sales and a reasonably good chance of higher-than-expected shareholder capital return.Mitsubishi Corporation's Q1 ...

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SubstancePI still rate Mitsubishi Corporation (OTCPK:MSBHF) (OTCPK:MTSUY) [8058:JP] as a Buy. The company's future financial performance is expected to be boosted by asset sales, and the stock's actual buybacks and dividends for FY 2024 (YE March 31, 2025) could potentially be above expectations. These are the key positives that make Mitsubishi Corporation a Buy in my opinion. My prior update published on July 11, 2024 drew attention to Mitsubishi Corporation's \"portfolio restructuring efforts and its energy transition-related business operations.\" Readers should be aware that they can deal in Mitsubishi Corporation's shares on the Over-The-Counter market and the Japanese equity market. The mean daily trading values for the company's Japan-listed shares and OTC shares were $200 million and $700,000, respectively for the last three months as per S&P Capital IQ data. Investors can buy or sell Mitsubishi Corporation's shares listed on the Tokyo Stock Exchange with US stockbrokers like Interactive Brokers. Asset Sales Are Expected To Support MSBHF's Future Earnings Mitsubishi Corporation's most recent quarterly or Q1 FY 2024 bottom-line performance surpassed expectations as a result of substantial asset sales. Looking ahead, I see MSBHF continuing with asset divestments to support its future earnings. Net profit for MSBHF grew substantially by +36.7% YoY to ¥317.7 billion in the first quarter of the current fiscal year. This was equivalent to 37% or more than a quarter of the company's full-year net income guidance of ¥950 billion. In its Q1 FY 2024 results presentation slides, Mitsubishi Corporation disclosed that it recognized a significant ¥96.9 billion gain pertaining to the \"divestiture of two Australian metallurgical coal mines\" in the latest quarter. Mitsubishi Corporation has guided for further asset sales to be reflected in its results for the coming quarters. At the company's Q1 FY 2024 analyst call in the prior month, MSBHF highlighted that its \"Urban Development & Infrastructure segment and the Power Solution segment will continue to see recurring gains from the divestiture of assets.\" Separately, MSBHF executed on two key asset monetization deals in recent times. On May 20, 2024, the company disclosed that it sold a \"35.12% stake in Japan KFC Holdings Co., Ltd.\" for ¥40 billion. Also, Princes Group revealed in its May 27, 2024 blog post that it was divested by its parent Mitsubishi Corporation for £700 million or ¥134 billion. Mitsubishi Corporation had indicated at its first quarter earnings call that the gains relating to these two asset sales will be included in its Q2 FY 2024 results expected to be released in November. It is also worth noting that Mitsubishi Corporation's actual asset monetization is ahead of schedule. The company had previously set a target of generating ¥2.0 trillion worth of cash flow from asset sales for the FY 2022-2024 time frame. The company has already realized ¥1.8 trillion in cash flow from the company's asset divestments carried out between the start of FY 2022 and end-Q1 FY 2024. MSBHF emphasized in the company's first earnings presentation slides that it \"will cautiously assess our original forecast\" following its above-expectations Q1 net income. This sends a strong signal that Mitsubishi Corporation could potentially revise its current full-year earnings guidance of ¥950 billion upwards subsequently. The analysts' consensus FY 2024 bottom-line forecast for Mitsubishi Corporation is ¥996 billion now according to S&P Capital IQ, and this is already +5% above MSBHF's current net profit guidance. In a nutshell, I think that Mitsubishi Corporation's bottom line will continue to surprise on the upside in the quarters ahead, considering the earnings contributed by asset sales. Mitsubishi Corporation's Future Shareholder Capital Return Could Throw Up Positive Surprises The company's actual dividends and share buybacks for the new fiscal year or FY 2024 ended March 31, 2025 might be better than what investors are hoping for. MSBHF stressed at the company's Q1 FY 2024 analyst briefing that it will look at the possibility of \"additional (shareholder capital) returns\" depending on its actual FY 2024 financial performance. At its recent quarterly results briefing, Mitsubishi Corporation also added that the choice between dividends and repurchases as the form of capital return will be \"determined based on the circumstances.\" In the preceding section, I noted that the company is in a good position to deliver above-expectations earnings for the current fiscal year thanks to asset sales. This also means that there is the potential for Mitsubishi Corporation to return a bigger amount of capital to its shareholders via buybacks and dividends. Mitsubishi Corporation spent around ¥0.6 trillion on share repurchases in the previous fiscal year or FY 2023. According to its disclosures on April 1, 2024 and September 18, 2024, the company is estimated to have already allocated ¥395 billion of excess capital to buybacks between April 1, 2024 (start of FY 2024) and September 17, 2024 as per my calculations. It is possible that Mitsubishi Corporation will do additional share buybacks in 2H FY 2024 (October 1, 2024 to March 31, 2025), so that its total repurchases for this fiscal year will be at least on par with that for FY 2023. On the other hand, Mitsubishi Corporation's current FY 2024 dividend guidance of ¥100 per share is equivalent to a 42% dividend payout ratio based on the company's ¥950 billion net profit guidance this year. If the company's actual FY 2024 earnings turn out to be close to ¥1 trillion (as per consensus estimate of ¥996 billion) or better, a ¥100 per share dividend will translate into an even lower 40% dividend payout ratio. On average, listed companies around the world distribute about 48% of their respective earnings as dividends, based on investment firm Fidelity's data. Mitsubishi Corporation certainly has the potential to increase its dividend payout ratio to a level nearer to the worldwide mean. Mitsubishi Corporation's forward FY 2024 shareholder yield is an enticing 6.7%, taking into account its current ¥100 per share dividend guidance for the current fiscal year and the ¥395 billion of buybacks it has done in 1H FY 2024. The stock's actual FY 2024 shareholder yield could be even better, assuming additional repurchases and a higher-than-expected dividend payout ratio, as detailed in this section. Variant View Mitsubishi Corporation stock might do poorly under certain scenarios. One potential scenario sees Mitsubishi Corporation suspending buybacks and distributing actual dividends that are below guidance. Another potential scenario has MSBHF failing to sell assets at reasonable valuations due to a weak market environment. Conclusion I continue to have a Buy rating assigned to Mitsubishi Corporation. The stock is undervalued as per my Gordon Growth Model valuation presented below, and there is potential upside associated with earnings, dividends and buybacks. Based on the Gordon Growth Model, a stock is justified trading at a P/B ratio equal to [ROE - Perpetuity Growth Rate] / [Cost of Equity - Perpetuity Growth Rate]. Using assumptions of a 10.6% ROE (consensus FY 2024 forecast), an 8% Cost of Equity and a 3% Perpetuity Growth Rate, I arrive at a target P/B metric of 1.52 times for Mitsubishi Corporation. The stock is now trading at 1.25 times trailing P/B according to S&P Capital IQ data, which translates into a capital appreciation potential of +22%. The total return potential for Mitsubishi Corporation is even better, at almost 29%, including the stock's shareholder yield of 6.7%.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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