Mitsui & Co.: FY 2023 Looks Decent Despite Iron Ore Price Drop

Summary

• Iron ore prices have stabilized but will not be as strong as in FY 2022.  Mitsui's other major commodities like oil, gas, and coal are stronger.
• The company's FY 2023 profit forecast of ¥800 billion is below 2022 actuals, but the stock is still cheap at 6.4 times forward earnings.
• The semiannual dividend of ¥60 per share is well-covered and results in a yield of 3.75%.
• The stock remains a good inflation hedge, but US investors should consider the effects of a weaker yen.

BING-JHEN HONG/iStock Editorial via Getty Images

2022 Will Be Hard To Top But Upside Exists

Mitsui & Co. (OTCPK:MITSY) (OTCPK:MITSF) is a massive conglomerate with 279 subsidiaries and 230 equity-accounted investments across its 7 business segments. Still, the commodity-heavy Mineral and Metal Resources and Energy segments make up more than half the company's earnings. This means that the prices of a few commodities including iron ore, gas, oil, and coal are big drivers of Mitsui's results and outlook.

In FY 2022 (the fiscal year ends in March), Mitsui earned a record ¥914.7 billion, thanks mostly to stronger pricing for iron ore and fossil fuels. Food and fertilizer inflation also helped the company's smaller Lifestyle and Chemicals segments. The Machinery and Infrastructure segment also did well due to the railcar leasing business, the company's stake in Penske Automotive Group (PAG), and MBK USA Commercial Vehicles, which co-owns Penske Transportation Solutions (truck leasing) along with PAG and Roger Penske's private company. You can read more about Penske Automotive in my recent article.

Looking forward, Mitsui is forecasting a lower result for FY 2023 of ¥800 billion, largely from lower iron ore prices. Energy will benefit from higher fossil fuel prices. Machinery and Infrastructure will strengthen further, and the other segments will be little changed from FY 2022.

Mitsui 4Q 2022 Earnings Slides

Iron ore prices were volatile in FY 2022, peaking around $225/ton last summer before plummeting all the way to $85 in November. Since then, prices have recovered to $142 and are now more stable.

Trading Economics

The average price in FY 2022 was $153/ton. Mitsui does not disclose their price forecast for the current year, but it appears to be under the current price based on the drop-off in the Mineral and Metal Resources segment profit forecast. Lockdowns in China were a recent source of worry about demand, but other analysts point to new construction-related stimulus in China and lower supply as a reason for prices to stay supported. If prices stay at these levels, there is upside to Mitsui's forecast. Coal prices also remain on a tear following a strong FY 2022 while copper has declined from recent highs but remains above Mitsui's FY 2023 forecast of $9,150/ton. Production volumes for iron ore and coal are planned to increase in FY 2023 after a few years of decline.

Mitsui 4Q 2022 Earnings Slides

In the Energy Segment, Mitsui reported actual average prices of $68/bbl for oil and $3.72/mmbtu for natural gas in FY 2022 and is forecasting $88 and $4.89 in FY 2023. There is also upside in this segment if prices stay at current levels. The company has an LNG joint venture in Russia where it already took some charges that affected 2022 results. They increased the discount rate on estimated future earnings reduce the equity value of the investment and also increased a loan loss provision associated with the project. Unlike most Western companies however, Mitsui did not announce they were fully writing off or looking to sell their stake. Any change in that policy in FY 2023 would be a downside risk.

Investors should not be worried about the 2023 guidance being lower than the 2022 actuals. This is expected for a primarily commodity-based company, and upside exists for Iron Ore, coal, oil, and gas based on current price levels.

Valuation And Capital Management

The profit forecast of ¥800 billion is equal to ¥499.71 per ordinary share. The P/E is 6.4 based on the closing price in Tokyo on the earnings report date. The company increased shareholder's equity by 22.6% in FY 2022 to ¥5,605 billion or ¥3501.21 per share. The P/B ratio is therefore 0.91. This is the second cheapest of the trading companies. Return on equity was in the middle of the pack at 16.4% ahead of the earnings release but now stands at 18.0% based on FY 2022 actual income and the average of starting and ending equity.

Seeking Alpha

Seeking Alpha

Mitsui is planning to pay dividends of ¥120 per share in FY 2023, split in two semiannual payments of ¥60. This is a dividend yield of 3.75% and an increase of 14% overall from FY 2022. The ¥60 is unchanged from the year-end dividend for 2022, but there is still the possibility the company may increase the dividend in the second half as it did last year. The company authorized buybacks of ¥100 billion through September 2022. This is less than the ¥175 billion bought back in FY 2022 but again leaves open the possibility for more buybacks in the second half.

Mitsui's balance sheet continues to strengthen, with debt/equity ratio down to 0.60 from 0.72 a year ago. Book equity value improved as retained earnings increased despite buybacks and dividends. Mark-to-market of equity investments and currency translation to the weaker yen also increased equity. Long term debt increased by about ¥200 billion, about the same amount as it decreased in FY 2021.

Mitsui 4Q 2022 Earnings Slides

Mitsui had enough core operating cash flow and asset sales in FY 2022 to cover all capex, investments, dividends, and buybacks. It is important to note that core operating cash flow excludes cash used to build working capital, which was ¥407 billion due to rising prices. Even after backing out this amount however, all capex, investments, and buybacks were still covered.

Mitsui 4Q 2022 Earnings Slides

For FY 2023, the core operating cash flow plan is ¥950 billion. This will cover the higher dividend payout of about ¥192 billion and announced buybacks of ¥100 billion, leaving ¥658 billion for capex or debt payoff before any asset sales.

Currency Risk

Mitsui's plan exchange rate for FY 2023 is ¥120/USD, however the yen has already weakened to ¥130/USD.

Bing

This is the result of increasing expectations for US Fed rate hikes in calendar 2022, taking the Fed Funds Rate to around 3% by early 2023. The corresponding interest rate in Japan is currently -0.10% with no announced plans to increase it despite rising inflation.

With most of Mitsui's commodity trade priced in USD, Mitsui's profits in JPY would increase if the Yen weakens. The company's domestic income would be less valuable in dollar terms, however. Therefore, a US ADR holder is partially exposed to currency risk owning a Japanese company in this environment. Berkshire Hathaway (BRK.A) (BRK.B) issued Yen-denominated debt to hedge its ownership of the Japanese trading companies. The small investor can't do this, so my advice is just be aware of the risk and know that the impact will likely average out over the long-term. If that is not enough, you could consider shorting the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) as a hedge.

Conclusion

Mitsui produced record results in FY 2022. The outlook for 2023 is lower but the company remains cheap at a P/E of 6.4. The lower profit forecast is mostly due to lower iron ore prices, but there is some upside if prices just stay at current levels. There is also upside based on oil, gas, and coal prices. The dividend yield of 3.75% is attractive and also has upside if the company is performing well in the second half of the fiscal year.

Since my last article on 2/5/2022 the stock is up 7.7% in Tokyo, but the ADR is down 3.8% due to the weaker yen. Interest rate policy in the two countries has diverged with the US looking to aggressively raise rates and the BOJ holding below zero. Personally, I am fine holding the ADR and accepting the currency risk unhedged but new investors should be aware of this before starting a position. I expect the commodities priced in dollars will result in higher profits in Yen, and eventually be reflected in the share price, offsetting the currency effects.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MITSY, BRK.B, PAG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.