Nippon Express will need to look abroad for growth

Challenging trading conditions in Japan and a strengthening domestic currency will likely continue to hurt Nippon Express’ core businesses.

These trends are unlikely to change materially in 2017. However, over the very short term, its first-quarter results due at the end of July will likely shed a light on its growth prospects, while providing further details about its capital allocation strategy.

In the fiscal year ended March 31, 2016, domestic freight “suffered from sluggish freight movement, reflecting signs of weakness in production by companies owing to shifts in economic currents, and stagnant shipments, among other factors”, it said, adding that “international freight was generally weak, due to factors including a reduction in freight mainly to Asian countries as a negative trend continued in both exports and imports”.

With a market cap of $4.9bn, it planned to generate 40% of revenues from abroad last year, but overseas sales ended up accounting for only 36.2% of group turnover. Revenues were marginally lower year-on-year, with a top-line of JPY1.9trn ($17.2bn, based on the $/JPY exchange rate as at March 31), down from JPY1.92trn one year earlier.

Operating income rose, as did margins, confirming trailing trends – in fact, profitability has been on its way up since 2012. Higher earnings were primarily responsible for surging return on assets, up 50 basis points year-on-year to 2.4%, while rising return on equity was achieved thanks to a lower book value of equity.

Meanwhile, cash flow from operations rose 5.7% to JPY78.8bn ($703m), although core free cash flow was negative to the tune of JPY44bn due to cash outflows from heavy investment.

However, rising cash flow from financing contributed to mitigate the impact on its annual gross cash pile, which remained stable year-on-year at JPY146bn.

Executives are managing expectations. According to Nippon Express, revenues are projected to grow 1% to JPY1.93bn this year, with particularly bullish forecasts pointing to a stronger financial performance in the second half of fiscal 2016, when the group is expected to generate almost JPY1tr of sales as well as the majority of its operating income.

As far as capital allocation is concerned, it is adopting a conservative dividend policy, with a trailing payout ratio at 30.8%, which is below a five-year mean. A prudent approach in income distribution points to additional extraordinary corporate activity, including acquisitions.

As we argued in our annual global freight forwarding report, not only does Nippon – which has a history of takeovers – generate enough cash flow to pursue mergers and acquisitions, but it could also exploit its lean balance sheet to strike debt-financed, accretive deals now that a major reorganisation of its corporate tree has been completed.

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Source: Transport Intelligence, July 13, 2016

Author: Alessandro Pasetti