Introduction and Investment Thesis
The 5 largest trading houses in Japan received a lot of attention over the last few months after the Oracle of Omaha came out praising them publicly.
The largest of them all is Mitsubishi Corporation (OTCPK:MSBHF) which is trading in Tokyo under ticker code 80580, and in the U.S. as an ADR.
With Buffett praising these five companies, it has led to a healthy increase in the share price when we compare them with BlackRock’s iShares JPX-Nikkei 400 ETF (JPXN).
Has the train left the station, or is it still a good time to follow the Oracle of Omaha, as he surely is investing for the long term far beyond his own lifetime?
Financial Results FY 22
Mitsubishi Corporation posted its second consecutive year of higher consolidated net income. For the FY 2022, which ended on 31st of March 2023, it was the first time in the company’s history that they surpassed ¥1 trillion. It came in at ¥1.181 trillion
EPS for the year was ¥850 which equates to $6.07. This gives us a very reasonable P/E of 6.86
As can be seen from the graph above, the management is guiding for a lower net income this year, yet they expect to increase the dividend per share from ¥180 to ¥200
Here is how the dividend history has evolved over the last 10 years.
The TTM dividend yield works out to 3.34%, which is not fantastic but acceptable when we also bear in mind that they are buying back shares too.
As MSBHF is a conglomerate with business interests ranging from trading, mining, and various industries, it is interesting to see where the bulk of the net income is coming from.
Mineral resources are by far the most significant contributor, with natural gas coming in second and the automotive industry being the third largest.
The adjusted free cash flow, before taking into account the return of funds to shareholders, was almost as high as the earnings as it was¥1.181 trillion. After distributing dividends and making share buybacks of ¥686 billion in total, the post-returns FCF was ¥400 billion.
They target a payout ratio of about 40% going forward.
Warren Buffett likes to use ROE as a good measurement of the company’s attractiveness.
MSBHF had an ROE of 14.8% in their last FY.
Japan’s central bank still has a negative interest rate, so borrowing money there, not like the rest of the world, is very advantageous if you can get double-digit ROE.
As Buffett pointed out in his interview with CNBC on his trip to Tokyo:
These companies were selling at what I thought was a ridiculous price, particularly the price compared to the interest rates prevailing at that time.”
In terms of their balance sheet, they account for the debt in the various subsidiaries. In total, the leverage levels ratios in these subsidiaries went from 38% in FY 2021 to 27.3% in FY 2022.
The net interest-bearing debt, excluding lease liabilities, was ¥3.238 trillion. Lease liabilities were ¥1.668 trillion.
MSBHF does have strong fundamentals and we can say that its position in Japan is something that can be described as a “moat”.
We have also noticed a more shareholder-friendly return of capital which is also a positive development.
Whether it will be a good investment does to some extent depend on the price development of many of the commodities, such as natural gas and minerals.
We are bullish on these.
Therefore, we think there is more upside potential for MSBHF despite the recent rise in the share price and will initiate coverage with a Buy stance here.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.