Japan-Weekly Strategy Report Breaking Away From “PBR Shakeup” and Low PBR Stocks May 27, 2020 461

Report type: Weekly Strategy

Breaking Away From “PBR Shakeup” and Low PBR Stocks

The closing price of the Nikkei Average on 19/5 was 20,433 points, which was 299 points higher than that of the previous day, and the weighted average PBR (Price-to-Book Ratio) increased to 1.0 times.  The weighted average PBR recovered to the net asset price level in about two months after the ratio had fallen to 0.82 times on 16/3.  Up until now, the basis of the fundamentals for the Nikkei Average being considered as oversold and undervalued in the midst of Covid-19 infection was the weighted average PBR being 1.0 times. We can say that it has reached a level where immediate future milestones can be easily attained. 

On the other hand, the current period forecast PER (Price Earnings Ratio), an investment measure most favored by investors, exceeded 20 times on 13/5 based on the weighted average of the closing price of Nikkei Average, for the first time since 2013/4.  It continued to rise even after that date to reach about 40 times on 21/5. Due to the uncertain impact of Covid-19, a number of companies have declined to announce their earnings forecasts.  With forecast earnings expected to decline even if performance forecasts are announced, it is becoming increasingly difficult for investors to use forecast PER as an investment measure.  Therefore, in general, focus is on the certainty of net assets increasing even if profits were to decline so long as earnings do not result in a loss.  It is therefore conceivable that there will be no choice but to continue to rely on investments based on actual PBR.  In that sense, it can be said that an environment called the “PBR shake-up” is evolving where the level of low PBR stocks which is well below a PBR of 1.0 times is likely to occur.   

However, low PBR is not the only option. First, the inability to effectively use the assets and the capital deposited by shareholders tends to be a reason for a particular stock to be neglected as being undervalued. Therefore, in addition to shareholder return measures to improve asset efficiency, it is also important that business structural reforms such as selection and concentration of businesses and withdrawal from unprofitable businesses are carried out.  Next, while many listed companies are not disclosing their business outlook, those that disclose their business outlook even if profits are likely to fall will likely be investment targets because we are likely to see sustainable increase in net assets, and value these as bargain stocks because the gap between the stock price and net asset price per share is increasing. With the prolonging of the “nest dwelling consumption” as a result of Covid-19, we can see that increasing demands for corrugated boxes due to expansion of online mail-orders are leading to an increase in corrugated box production.  Furthermore, the demand for non-woven fabric materials for masks is increasing worldwide.  With the resumption of economic activities, it has become necessary to use robots to clean hospitals, train stations, airports, commercial facilities, etc., safely with disinfectants to prevent infection, and to install acrylic sheet between facing seats at restaurants. It is therefore not surprising if companies arise from amongst paper and chemical manufacturers which can take advantage of such demands to eliminate their low PBR conditions.  

In the 25/5 issue, we will be covering Tomoku (3946), Mitsui Chemicals (4183), Nippon Steel (5401), and CYBERDYNE (7779).

  • Tomoku Co., Ltd (3946)    1,713 yen (22/5 closing price)

・A general packaging manufacturer established in 1949.  Operates the Corrugated Board Business that handles corrugated board sheet and cases, the Housing Business that sells housing materials to Sweden House, and the Transportation and Warehouse businesses.

・For FY2020/3 results announced on 8/5, net sales increased by 2.9% to 176.583 billion yen compared to the previous year, and operating income increased by 32.8% to 6.911 billion yen.  While striving to revise cardboard product prices, the spread of Covid-19 infections had contributed to the increase in corrugated board production for beverages, processed foods, chemicals, detergents, etc., thereby contributing to higher sales and profits.

・For FY2021/3 plan, net sales is expected to increase by 4.8% to 185.0 billion yen compared to the previous year, and operating income to increase by 8.5% to 7.5 billion yen.   In the Corrugated Board Business, the medium- to long-term market expansion for online shopping, the stay-at-home situation due to Covid-19 leading to increase in demand for food-related products resulting from “nest dwelling consumption”, and the increase in export prices for corrugated boxes as a result of shutdowns in Europe and the US leading to decrease in waste paper supply, had all become push factors

  • Mitsui Chemicals, Inc (4183)   1,943 yen (22/5 closing price)

・A comprehensive chemical manufacturer established in 1997 through the merger of the former Mitsui Chemical Industry with Mitsui Toatsu Chemicals.  Main businesses include the Mobility Business, Health Care Business, Food & Packing Business and manufacturing and sales of basic materials.

・For FY2020/3 results announced on 14/5, net sales decreased by 9.7% to 1.3389 trillion yen compared to the previous year, and operating income decreased by 23.3% to 71.636 billion yen.  Sales declined due to a drop in sales prices as a result of a fall in crude oil prices and a decline in sales volume due to the spread of Covid-19.  In addition, sales conditions deteriorated and fixed costs increased, leading to a decline in profits.

・For FY2021/3 plan, net sales is expected to be 1.145 trillion yen, and operating income to be 37.0  billion yen.  Comparisons with the previous period are not stated as the company has adopted IFRS with effect from FY2021/3.  Automotive parts business is expected to continue to struggle, and there is concern about supply of IPA (Isopropyl Alcohol) as a disinfectant in Europe and the US even as demand there is increasing.  In addition, the price of non-woven fabrics for masks and protective clothing is increasing due to global demand.  Company is therefore also expanding production by increasing factory capacity.



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