Matter of Fact – w/c 4th May 2015


  1. Tamron Co Ltd (7740 JP) encouraging result
  2. Tesco PLC (TSCO LN) earnings
  3. Cummins (CMI US) Q1 earnings in line with QMG view
  4. OKUMA Corp (6103 JP) beats estimate
  5. Tadano (6395 JP) better than expected
  6. Applied Materials, Tokyo Electron (8035 JP) scrap merger plan
  7. Tokyo Electron (8035 JP) share price weakness, a buying opportunity
  8. Praxair (PX US) positive signs despite results



US GDP front page

We recently published our take on the US GDP results (“US GDP DISAPPOINTS, WHAT DOES OUR DATA SAY?”). A number of transitory factors were considered for the slowdown but there are sub-sectors that will benefit positively from this. Click on the link to see more.



  1. Tamron Co Ltd (7740 JP) encouraging result [click for story]

Source: Bloomberg

Company: Tamron Co Ltd (7740 JP)

QMG product view: JA33.4 – Producers of optical instruments & photographic equipment

Event: Q1 15 Results


o          Revenue: JPY16.8bn: +19% yoy

o          Operating profit: JPY1.6bn: +136% yoy

o          Operating margin: +470bps to 9.4%

o          FY 2015 guidance: UNCHANGED – Revenue +6.6% to JPY78.5bn and operating profit +8.6% to JPY6.6bn. Forecast operating margin therefore +15bps to 8.4%.

QMG Opinion

This is a very encouraging set of Q1 results from Tamron showing a strong yoy improvement in revenues and substantial recovery in profitability. A key feature of the most recent QMG data across the product group is the very strong margin performance (indicating +862bps) – we note that this is not in either consensus estimates or company guidance. Consensus estimates would appear to have scope to move higher with the current sales forecast implying +5.2% – below the +6.6% guidance and in the context of +19% Q1 performance.


Other: Howden Joinery Group PLC (HWDN LN)

Howden sales grow by 9.4% for period to mid-April despite one fewer trading day

Howden has issued a typically brief Interim Management Statement this morning, covering the period to mid-April. Sales growth has remained strong at the beginning of 2015 despite a more challenging comparative period, growing by 9.4% on a reported basis, or 7.0% on a same depot basis. Howden states that performance is in line with expectations and that visibility over current trading prospects indicates that market conditions remain good. We note that the positioning of Easter, earlier in 2015, means the Howden had effectively one fewer trading day in the current year. There has been no negative impact to date from the upcoming General Election. Sales for the January/February period grew by 9.9% on a reported basis.



2. Tesco PLC (TSCO LN) earnings [click for story]

Source: Bloomberg

Company: Tesco PLC (TSCO LN)

QMG product view: UK52.11/2 – Supermarkets

Event: FY14 Results


  • Lfl Sales yoy: -1.9%
  • Lfl Volums yoy: +1.2%

Since Tesco change of management and then in its most recent results ( year end Feb 28th), there has been a lot of focus on their comments regarding giving the consumer a better offering – in shopping “experience” and price. In the recent numbers, Tesco showed they have stabilised their own Lfl numbers – and in q4 rebounded to a Lfl sales number of “only” minus 1.9%. They also highlighted in the presentation that volume in the same quarter yoy Lfl was + 1.2%.

QMG Opinion

  • Most UK supermarkets data sees volumes increasing to +4.9% (3 month moving average yoy). Compared to the volume number for the sector of +1.9% to end Feb.
  • Pricing was still tough -1.9% to end March (a small decline from previous month) – appears to still be discounting ongoing across the group – BUT – there is clearly a rebound in volumes.
  • Translates to +3% sales growth for the sector – seems to be clear turn in previous declining trend
  • Important to note that – weak annual comparative last March.
  • Last April much more challenging – may well be that magnitude of “spike” cannot be maintained – signs of a bottoming.
  • QMG margin analysis still shows contraction.



3. Cummins (CMI US) Q1 earnings in line with QMG view [Click for full story]

Seeking Alpha – April 28th, 2015

Company: Cummins (CMI US)

QMG product view: US29.11 – Producers of engines & turbines excl. aircraft & vehicle engines and US34.3 – Producers of parts for motor vehicles & their engines

Event: Q1 15 Results


o          Revenue: $4.7bn: +7% yoy – North America revenues +17% however International sales -6%

o          EBIT: Increase to $562m (11.9% of sales) from $528m (12.0% of sales) yoy

o          Cummins expects full year 2015 revenues to grow between 2 to 4%

QMG Opinion

Cummins continues to reflect our positive view on the producers of engines and turbines (US29.11) and producers of parts for motor vehicles and engines (US34.3) product groups. Margin performance within engines and turbine production group is the strongest (+695bps in March – up on February 636bps). Consensus estimates see growth of 2.72% on the quarter, in line with QMG: 18.58% (US29.11) and 6.64% (US34.3).


 4. OKUMA Corp (6103) beats estimate [click for story]

Source: Bloomberg

Company: OKUMA Corp (6103 JP)

QMG product view: JA29.4 – Producers of machine tools

Event: FY14 Results


o          Revenue: JPY166.23bn: +2% versus consensus estimates (Toyo Keizai) and +23.7% yoy

o          Operating profit: JPY14.53bn – in line with consensus estimates (Toyo Keizai) and +55.5% yoy

o          Operating margin: +175bps to 8.7% (in line with consensus/corporate guidance)

o          2015 guidance: Revenue +8.3% to JPY180bn and operating profit +31% to JPY19bn. Forecast operating margin therefore +52bps to 10.6%.

QMG Opinion

Okuma is a major Japanese machine tool maker, with the majority of its production based in Japan (85% of P,P&E) – making it a strong fit with our observations from product JA29.4. This is a very strong set of results in terms of FY revenue and operating profit performance and guidance for FY15 will see upgrades to consensus estimates.


5. Tadano Ltd (6395 JP) better than expected [click for story]

Source: Bloomberg

Company: Tadano Ltd (6395 JP)

QMG product view: JA29.52 – Producers of machinery for mining, quarrying & construction

Event: FY15 Results


o          Revenue: JPY204bn: +2% versus consensus estimates (Toyo Keizai) and +12.3% yoy

o          Operating profit: JPY29.5bn – +8.3% vs consensus estimates (Toyo Keizai) and +39.4% yoy

o          Operating margin: +290bps to 14.5% (+100bps stronger than consensus estimates)

o          2016 guidance: Revenue +1% to JPY206bn and operating profit +1.8% to JPY30bn. Forecast operating margin therefore +10bps to 14.6%.

QMG Opinion

A strong set of results from Tadano – better than consensus estimates in terms of both sales and operating profit. QMG data remains positive on this product group with current sales and margin observations significantly stronger than the levels implied in FY16 guidance (understandably cautious at this stage of the year?). We see scope for consensus operating profit forecasts to increase slightly.



6. Applied Materials, Tokyo Electron Scrap Merger Plan [click for story]

Wall Street Journal – April 27th, 2015

Company: Tokyo Electron (8035 JT) and Applied Materials (AMAT US)

QMG product view: JA32.1 and US32.1 – Manufacturers of Electronic Components

Event: Merger Talks


  • Tokyo Electron and Applied Materials will scrap their planned merger
  • Estimated market value would have been $29bn

QMG Opinion

  • QMG data reflects positively on both product groups seeing Sales growth above consensus in Japan (16.19% vs -20.38%). Sales in the US also reflect upside to our view (4.3%) versus consensus (1.9%). *
  • The deal would have seen an improvement in revenues for Tokyo Electron and pushed consensus further in our favour.
  • We still see upside to consensus despite this however. Today, Tokyo Electron (8035 JT) shares fell  -15% on the back of news overnight that the merger with Applied Materials (AMAT US) had been scrapped – despite the shares having traded weaker against a predominantly stronger market for the past two weeks and the company saying that it would purchase up to JPY120bn of its own stock. QMG data remains very positive on the products that 8035 produces (JA32.1 and JA33.3), and we consider this an ideal time to revisit the stock.

Further details

  • Background to AMAT merger: Way back on 24/9/13, Applied Materials (AMAT US) announced its intention to merge with Tokyo Electron by way of a 3.25:1 shares deal. This valued the combined company at c$30bn (to be called Eternis) and would have resulted in 8035 shareholders owning 32%. Having secured most of the regulatory approvals required, the US DoJ – which had raised competition concerns – rejected the proposed remedies to protect competition scuppering any ‘realistic prospect for the completion of the merger’.
  • As to the specific concerns raised by the DoJ, we note that the combined entity would have had c25% share of the total equipment market and closer to 50% across some specialist product groups (creating near-duopolistic markets in some cases). Whilst the market was not privy to the specifics of the competition concessions offered to the regulator, we suspect that after 18 months of negotiation considerable compromise would have been put on the table, which leads us to suspect that the more probable reason for blocking the deal was political. This deal was a ‘tax-inversion’ deal, in that part of the merger involved the combined entity moving its domicile to the Netherlands, thus reducing the amount of US tax paid on foreign profits.
  • The significant volume traded today can be explained by arb funds unwinding active positions – and would represent an opportune time for fundamental investors to be buying. QMG product level data shows sales and margins at the product level increasing at above average (and greater than consensus forecast) levels – underpinned by very strong volume growth.
  • Consensus estimates currently forecast just 7% FY sales growth – compared with QMG data for JA32.1 showing +16.2%. The shares now trade at a discount to both historic average multiples (just 6.9x EV/EBITDA compared to trailing 3 year average of 13-15x) and peer group average (current PER 14x vs 16x) as well as offering a relatively attractive dividend which yields c100bps more than the Japanese market average.





7. Nippon Steel & Sumitomo Metal Corp (5401 JP) in line with QMG view [click for full story]

Source: Bloomberg

Company: Nippon Steel & Sumitomo Metal (5401 JP)

QMG product view: JA27.1 – Producers of basic iron & steel

Event: FY 15 Results


o          Revenue: JPY5.61tn: in line with consensus estimates (Toyo Keizai) and +1.7% yoy

o          Operating profit: JPY349.5bn: +5.9% on consensus estimates (Toyo Keizai) and +17.1% yoy

o          Operating margin: +80bps to 6.2% (and +40bps on consensus estimates)

o          FY 2015 guidance: Not provided

QMG Opinion

The story here is very much in line with what QMG data was highlighting – that these results would surprise on the upside in terms of margin/profitability. Clearly a weaker JPY has helped push Q4 profitability and we note that this is a feature likely to remain a positive across the coming financial year. In addition raw material prices are at more favourable levels, which in the face of an industry wide effort to manage production and reduce excess inventories, should help sustain profit at/around current levels. This does not yet appear to be reflected in consensus estimates.


8. Praxair (PX US) positive signs despite results [click for story]

Seeking Alpha – 29th April 2015

Company: Praxair (PX US)

QMG product view: US24.11 – Manufacturers of Industrial

Event: Q1 FY15 Results


o          Sales: $2.8bn (-9% yoy) vs QMG: +11.92%

o          Operating margins: 22.6% vs QMG: 11.94%

o          EBITDA: 33.0%

o          Results challenged by negative impact thanks to foreign exchange effects as US dollar strengthened against most foreign currencies.

QMG Opinion

Whilst the most recent earnings update is not in line with QMG’s sector view on US Manufacturers of Industrial Gases we highlight that positive Margin growth is reflected.

Given the recent agreements to expand the US and Chinese networks and the fact that 52% of revenue comes out of North America, we expect actual results to be more positive moving into full year earnings. Investor view is positive as well since the share price is up 1.55% the day after earnings announcement.


Other: Lafarge SA (LG FP)

Lafarge has reported that Q1 EBITDA was 17% higher year-on-year (yoy) at €403m versus the Davy estimate of €406m and consensus of €370m. This included €15m of CO2 sales. Like-for-like (lfl) EBITDA was up 14% on a yoy basis with margins c.180bps higher versus Q1 2014. Group revenues rose 6% yoy in the quarter to €2779m but were flat on a lfl constant currency basis (Davy: €2.8bn) as lfl cement volumes for the group declined by 3% yoy, with aggregates and concrete shipments flat and -5% yoy respectively.

The group reiterated its FY2015 savings target of €550m. In the first quarter, Lafarge achieved total savings of €125m (€85m from cost cutting and €40m from innovation). Net debt at the end of the quarter fell to €9.8bn (down from €9.95bn one year ago), and the group continues to target a further reduction to €8.5-9bn by end-2015.

Other: Holcim

Holcim has reported a solid set of results for Q1 that were ahead of our forecasts but slightly below consensus estimates. Overall, Q1 like-for-like (lfl) sales fell 1.6% year-on-year (yoy) to CHF3.97bn versus our forecast of CHF3.87bn (consensus: CHF4.04bn). Q1 EBITDA fell 4% yoy on a lfl basis to CHF593m, well ahead of our forecast of CHF554m (company consensus: CHF613m). EBITDA margins fell 20bps yoy. Relative to our forecasts, the numbers surprised positively in Latin America and Asia Pacific. The headline figures include merger-related costs of CHF44m, without which lfl EBITDA would have risen by 3.1% yoy. The group’s cost programme (HLJ) delivered savings of CHF85m in the quarter, bringing total savings to date to CHF1.93bn – well in excess of the original target (CHF1.5bn). Net debt at end-March was CHF9.67bn (Q114 was CHF10.04bn), bringing ND/LTM EBITDA to 2.6x. The net debt figure was helped by the sale of Holcim’s stake in Siam City Cement for CHF661m. This resulted in a gain before taxes of CHF371m. The group also completed its asset swap with Cemex and has finally received clearance in India from the Foreign Investment Promotion Board for its merger of ACC and Ambuja.



Focus List Earnings results:

POSITIVE DW US Equity Drew Industries Inc 5/05/2015
POSITIVE SBH US Equity Sally Beauty Holdings Inc 5/05/2015
POSITIVE VMC US Equity Vulcan Materials Co 5/05/2015
POSITIVE VMC US Equity Vulcan Materials Co 5/05/2015
NEGATIVE 5947 JT Equity Rinnai Corp 8/05/2015
POSITIVE 6674 JT Equity GS Yuasa Corp 8/05/2015


Other earnings of note:

  • 4th May 2015 – Tyson Foods (TSN US) – previously on our focus list but taken off along with SAFM US due to bird flu concerns
  • 6th May 2015 – Morrison (MRW LN) and Sainsbury (SBRY LN), especially with relation to Tesco, Aldi, Lidl, Waitrose
  • 6th May 2015 – Bayerische Motoren Werke AG (BMW GY) – relevant in line with our Global Auto’s report we produced last week
  • 8th May 2015 – Toyota Motor Corp (7733 JP) – as per above
  • 8th May 2015 – Toshiba (6502 JP) – previously highlighted focus list stock


Economic indicators:

  • US Manufacturing New Orders – 4th May 2015
  • Markit Manufacturing PMI (multiple European countries) – 4th May 2015
  • ISM Non-Manufacturing Index – 5th May 2015
  • ADP change in Nonfarm payrolls – 6th May 2015
  • Markit Services data (multiple European countries) – 6th May 2015
  • Euro Retail Services – 6th May 2015
  • Parliamentary Election (UK) – 7th May 2015
  • US Unemployment Rate – April ’15 – 8th May 2015
  • US Change in Nonfarm Payrolls – April ’15 – 9th May 2015
  • US Average weekly earnings – April ’15 – 9th May 2015


QMG Market Commentary:

  • US Housing market – 4th May 2015
  • UK Supermarkets – mid-week




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