Hitachi Transport System needs alternatives

The shareholders of Japanese 3PL Hitachi Transport System have not had the best of times since the turn of 2015, with their holdings currently hovering around multi-year lows.

While all eyes have been for some time on the Bank of Japan’s monetary policy, which inevitably affects the equity valuations of all the major domestic companies, its annual results released in May provided little relief to investors, who are eagerly waiting for first-quarter figures to be released at the end of July.

According to consensus estimates, turnover is expected to hit JPY164bn in the first quarter, down from JPY169.6bn one year earlier – and could represent the worst performance over the past nine quarters.

In the 12 months ended March 31 2016, Hitachi saw revenues rise only 0.3% to JPY680bn, which was a modest performance, although most of its key financial metrics – operating cash flow, operating profit, returns and net earnings – were not particularly disappointing.

Severe headwinds are inevitable as most of its sales are generated domestically, which makes Hitachi an ideal candidate for deal-making outside Japan, with particular focus on contract logistics activities.

In fiscal 2015, cost of sales fell on the back of falling revenues, boosting gross profit, up to JPY71.9bn from JPY63.6bn one year earlier. Although core operating costs such as selling, general and administrative expenses rose 8.4% year-on-year, EBIT surged to JPY28.3bn from JPY21.4bn on a comparable basis.

Foreign currency adjustments had a significant impact on its bottom line in 2015, losing it JPY5.3bn. By comparison, they positively contributed to net earnings to the tune of JPY3.4bn in the previous year. This is a further reason why further geographical diversification could pay dividends over the medium term.

That said, net income rose 5.4% to JPY15.5bn, with earnings per share (EPS) coming in at JPY125.6 from JPY118.7. EPS is expected to increase for the full year, and so is the pay-out ratio, although dividends remain relatively low based on Hitachi’s earnings power, and this element could be a drag on its equity valuation.

Its forward price-to-earnings ratio is below average at 10.6x, and multiples for cash flow are also under pressure, although its cash flow profile is reassuring. Operating cash flow came in at JPY38.8bn from JPY32.2bn in the prior year, while cash flow from investment almost halved, and cash flow from financing was only marginally higher. As a result, its gross cash position rose to JPY45bn from JPY34.5bn one year earlier.

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Source: Transport Intelligence, July 06, 2016

Author: Alessandro Pasetti