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Stock Research Reports
Morgan Stanley (Japan)
Investment
Perspectives Japan -- Nippon Suisan
From 1986 to 1989 I was Senior Editor and Supervisory Analyst for Morgan Stanley in Tokyo. Every Wednesday night I put to bed our flagship publication Investment Perspectives Japan. Our investment strategist introduced each issue with his view of the market, primarily from the standpoint of technical analysis. His remarks were followed by the comments of Morgan's industry analysts on sector fundamentals and the outlook for individual stocks. Supported by two associates, I edited every piece for content, structure, and style. Since most comments were written in English by Japanese analysts, most required heavy editing and often a complete rewrite.
NIPPON SUISAN (1332): Stock Is a Hold Despite Hidden Assets
Shuichi Shibanuma - Research Comment - October 12, 1988
My investment opinion on Nippon Suisan stock is hold. Low interest rates, the strong yen, and weak oil prices do provide a favorable operating environment. And the market's continuing focus on hidden assets makes the equity relatively attractive within the food sector. But the difficulties the Company is currently facing in its main business areas prevent me from recommending purchase of the shares. Prospects for the Firm's fishing activities in the North Pacific, its principal earnings source, are not good, since the U.S. reduced the quota of pollack that the Japanese fishing industry could catch in this area -- which falls within the U.S. 200 mile fishing zone -- by 31% in December 1987. In response to this cutback, Nippon Suisan is likely to restructure its operations substantially during the next two to three years, which will probably include a reduction in its work force.
The Firm has already shifted its emphasis from fishing operations to food processing, a policy move that should be noted by investors. The processed food division, principally marine products, now accounts for about 30% of recurring profits, according to our estimate. Competition in this area is very intense, however. We estimate earnings per share in fiscal 1988 (ending March 1989) will drop 50% to ¥5.4 from ¥11.0 in 1987 because of (1) delays in rationalizing the shipping fleet and trimming personnel; and (2) continuing sluggishness in fish prices. Since the restructuring program will likely take two to three years to complete, we expect earnings per share to remain flat in fiscal 1989.
We estimate the Company's unrealized gains on its security holdings are ¥225.1 billion and on its real estate assets, ¥142.4 billion. (We have included in our hidden asset calculation only the Firm's holdings of stocks of listed companies and only its factories and research centers.) As much as 94% of the security holdings are financial stocks. Adjusting for all the unrealized gains would boost the book value per share to ¥1,568 from ¥232. The price-to-book value ratio on this basis would be just 0.5, compared with an average of 1.28 times for the major food companies. An average 10% rise in bank stock prices would increase the value of hidden assets ¥90 per share.
Plans for redevelopment of the area that includes Nippon Suisan's former 16,500-square-meter refrigerated warehouse in Harumi (water-front area in the center of Tokyo) are under way. A meeting between Nippon Suisan and the other five participants in the joint redevelopment project, including Onoga Cement and Mitsubishi Estate, has taken place, and a feasibility study will be undertaken in 1989. Construction is likely to begin next year and be completed in 1991. Although details of plans for the site have not been officially announced, the redevelopment will probably include luxury apartments for rental, "intelligent" office buildings, hotels, and marine facilities. Industry sources believe Nippon Suisan will construct a new warehouse on land leased from the Tokyo Metropolitan Government.
The capital expenditures likely to be incurred by Nippon Suisan in the redevelopment, including construction of the new warehouse, are estimated at ¥60 billion. Since much of the financing for the redevelopment will need to be raised in the capital markets or through bank loans, we estimate the project will not be in the black until about 1993. By the year 2000, however, we believe the redevelopment scheme has the potential to be generating recurring profits of approximately ¥3 billion.
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