Mitsui & Co.: Still cheap even though commodity prices peaked (OTCMKTS: MITSF)
Easy growth is over as iron ore prices peak
Mitsui & Co. (OTCPK: MITSY, OTCPK: MITSF) posted exceptionally strong earnings in fiscal 2022 driven by the Minerals & Metals and Energy segments, which make up a significant portion of Commodities. more than half of the company’s profits. The prices of a few commodities, including iron ore, gas, oil and coal, are the main drivers of Mitsui’s results and outlook. Prior to FY2022, the company had stagnant growth, even before the pandemic. In the current fiscal year ending 03/31/2023, the company expects to earn less, mainly due to lower iron ore prices.
|End on 03/31||¥ million||Growth||¥ per share||Growth|
|2023 (fcst.)||800 000||-12.5%||120||14.3%|
Data source: Mitsui & Co. financial results.
In its first-quarter 2023 results released on 8/2/22, Mitsui did not revise earnings or dividend guidance for the year, even though the company has already achieved about a third of the overall plan for the year. complete after just one trimester.
Iron ore was a major tailwind in 2022, but is now a headwind. This was completely offset by much higher coal prices, which in the first quarter were nearly double fiscal 2022 prices for coking coal and more than tripled for thermal coal. Although Mitsui does not disclose its price forecast for these commodities, Trading Economics forecasts continued weakness in iron ore and strength in coal. Rising oil prices also benefited the company this quarter.
The biggest bright spot, however, was the weaker yen, which makes earnings look better when translated from stronger foreign currencies. Of the year-over-year profit improvement of 83.7 billion yen in the first quarter, oil and gas prices contributed 25 billion yen and currencies 45 billion yen. Unfortunately for foreign shareholders, their stock price and dividends look weaker when converted from a weaker yen to their currency.
Apart from these important factors, Mitsui performed well in grain and agricultural chemical trading, although this was offset by higher costs across the business.
In the future, the Russian-Ukrainian conflict may keep coal, oil and gas prices high, although they are now a little outside their maximum values. Until iron ore slumps too far on weak demand from China, Mitsui should continue to generate quarterly earnings similar to Q1. This would lead to an upward revision to the forecast and dividend in the second half of the fiscal year, but nothing like the repeated increases we’ve seen in fiscal 2022.
While the low P/E anticipates weak commodity prices, Mitsui is still cheap relative to its peers. The company has used the past year of strong profitability to get its balance sheet in order and enable it to weather a weaker commodity environment while maintaining its attractive dividend.
Capital valuation and management
Mitsui’s earnings forecast of 800 billion yen is equal to 503.79 yen per common share, down from 499.71 yen at the start of the year due to buybacks. The P/E is down to 5.8 based on the closing price of ¥2,905.2 in Tokyo as of the earnings report date. Book value growth slowed significantly, with shareholders’ equity rising just 3% in the quarter to 5,771 billion yen or 3,641.13 yen per share. It is important to note however that the book value was impacted by an impairment of the Russian LNG project Sakhalin II. The current P/B ratio is now 0.80. This remains the second cheapest of the trading companies. Return on equity is still in the middle of the pack, beating Mitsubishi (OTCPK:MSBHF) and Sumitomo (OTCPK:SSUMF) (OTCPK:SSUMY) but less than Itochu (OTCPK:ITOCY) (OTCPK:ITOCF) and Marubeni (OTCPK : MARUF) (OTCPK: MARUY).
Mitsui left its dividend plan unchanged at ¥120 per share in fiscal 2023, divided into two semi-annual installments of ¥60. This is a dividend yield of 4.1%. The company is about halfway through its announced 100 billion yen buyback program through September 2022 and will cancel treasury shares this month. The dividend represents a conservative payout ratio of just 23.8%. Planned dividends and redemptions are still below Mitsui’s medium-term plan to return approximately 33% of core operating cash flow to shareholders.
Dividends for the full year are expected to be around 192 billion yen, so dividends plus redemptions of 292 billion yen represent less than a third of Mitsui’s 950 billion yen cash flow plan. basic operation. Even if economic conditions deteriorate in the coming years, Mitsui should be able to maintain its dividend by first reducing redemptions and then temporarily exceeding the 33% payout if necessary.
Mitsui’s balance sheet didn’t change much this quarter, with equity rising by only 200 billion yen, partly thanks to Sakhalin’s writedown. Debt has increased by about 300 billion yen, so the debt-to-equity ratio has halted its recent downward trend but remains low at 0.62, up slightly from 0.60 at the start of the l ‘exercise.
Mitsui had base operating cash flow of 300 billion yen in Q1 2023, or 32% of the 950 billion yen plan. The company has also raised funds through real estate sales in the United States and Singapore. This cash covered all investments, capital expenditures and redemptions with 82 billion yen remaining for the upcoming semi-annual dividend.
Longer term risks
Mitsui has invested heavily in the environmental arm of ESG with 130 billion yen of investments this quarter in renewable energy and carbon credit projects. This includes a 27.5% stake in European renewable energy company Mainstream, a renewable energy project in India, and Australian “carbon generation” company Climate Friendly. Individuals can decide for themselves whether this is a wise, forward-looking pivot to a greener world or an expensive mess. In any case, the returns from these investments are likely to be low in the short to medium term. At the same time, the company’s oil and gas production has fallen in recent years, suggesting underinvestment in a still-needed resource.
Coal production has also declined for 3 consecutive years, from 13.6 million tonnes in fiscal year 2020 to 11.8 in fiscal year 2022. Volumes are expected to return to 13 million in fiscal year 2020. fiscal 2024, but that seems unlikely, with actual production in the first quarter of 2023 reaching 2.1 million tonnes, compared to 2.8 last year.
After record results in fiscal 2022, Mitsui’s growth has slowed as commodity prices peak. Nevertheless, the company’s low P/E of 5.8 explains more than just the commodity outlook. Mitsui is also cheap relative to its peers despite a strong balance sheet and a well-hedged 4.1% dividend. Although there was no increase in earnings or dividend expectations with this quarter’s results, an increase is still possible if commodity prices do not fall too much this year.
Longer term, Mitsui’s growing interest in renewables has uncertain payoffs at the expense of declining fossil fuel production volumes. This may ultimately be good for the company, but creates uncertainty in the valuation of the stock. However, Mitsui has a low payout ratio of 23.8% and the ability to preserve the dividend in tough times by reducing redemptions. Mitsui remains a good choice for income investors who may face stock price volatility caused by commodity markets.