Kawasaki Kisen Kaisha Ltd
TSE:9107
Earnings Call Analysis
Q3-2024 Analysis
Kawasaki Kisen Kaisha Ltd
The company's recent financial outcomes reveal a solid performance, with reported operating revenues hitting JPY 715.3 billion. Furthermore, for fiscal year 2023, they now foresee operating revenues climbing to JPY 940 billion and net income attributable to owners of parent reaching JPY 105 billion. These figures show resilience and growth, with the revenue forecast increased from previous announcements by JPY 10 billion, although operating income projections were revised down by JPY 5 billion.
A robust financial health indicator, the equity ratio, stands at an impressive 73%, demonstrating a strong balance sheet. To reward investors, the company has raised the fiscal year-end dividend from JPY 100 to JPY 150 per share, leading to an anticipated full-year dividend of JPY 250 per share. Looking ahead, they expect to continue this generous dividend payout into fiscal 2024.
The company showed adaptability, revising Dry Bulk downward by JPY 3 billion and Energy Resource Transport by JPY 0.5 billion amidst market fluctuations. Product Logistics, on the other hand, paints a brighter picture with a forecasted 37% increase in full-year ordinary income compared to the previous fiscal year, underpinned by a strong car carrier business.
Navigational adjustments due to the Suez Canal's instability and Panama Canal restrictions could have lingering effects. These challenges, partly arising from regional conflicts and environmental factors, have companies rerouting and potentially influencing freight rates and shipping supply over the medium term. The company plans for these eventualities, expecting to reflect adjustments in their second half of the fourth-quarter results.
Looking at capital policy, the company remains committed to an aggressive shareholder return scheme of JPY 500 billion. This is part of a broader strategy, including an expected stock split to enhance stock liquidity and accessibility. By projecting growth-driven businesses and optimizing capital structure, they aim to improve corporate value further.
With significant geopolitical events such as the US-China tension, the Russia-Ukraine conflict, and instability in the Middle East, the company acknowledges these as critical factors that could impact industry performance. They are prepared to navigate these uncertainties strategically.
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Financial highlights brief report for our third quarter fiscal year 2023. A. Financial highlights for third quarter fiscal year 2023.
A-1. Financial results for third quarter of fiscal year 2023. For the 9 months through the third quarter of fiscal 2023, operating revenues were JPY 715.3 billion. Operating income was JPY 70.1 billion. Ordinary income was JPY 98.5 billion, and net income attributable to owners of parent was JPY 74 billion.
As for our key financial indicators, equity capital is JPY 1,508.5 billion, and the equity ratio is 73%. These were calculated using Japanese accounting standards. However, if we recognize the capital cost portion of our charter hire liabilities as on balance sheet liabilities in accordance with the IFRS, the international standard for our industry, our equity ratio is approximately 57% to 59%. We estimate that this figure is almost on par with those of major European container shipping companies. A-2. Financial results for third quarter fiscal year 2023 by segment. Turning to the financial data for the first 9 months of the fiscal year by segment, ordinary income was JPY 1.6 billion for Dry Bulk, JPY 4.7 billion for Energy Resource Transport, JPY 96.6 billion for overall product logistics and JPY 33.8 billion for Containership business. Ordinary income for product logistics, excluding containership, was JPY 62.8 billion, an improvement of JPY 12.6 billion year-on-year. B. Forecasts and initiatives for fiscal year 2023. B-1. Forecasts for fiscal year 2023 and key factors. In fiscal 2023, we expect operating revenues of JPY 940 billion, operating income of JPY 87 billion, ordinary income of JPY 135 billion and net income attributable to owners of parent of JPY 105 billion. The operating revenues and operating income figures show the performance of "K" LINE's own businesses before earnings from Ocean Network Express, ONE, are included in ordinary income. Operating revenues have increased by JPY 10 billion compared to the previous announcement and operating income decreased by JPY 5 billion, but ordinary income and net income attributable to owners of parent remain unchanged from the previously announced figures.
Our highest annual operating revenues to date were JPY 1,352.4 billion for the fiscal year ended March 2015, when Containership business with high operating revenues was one of "K" LINE's own businesses. Our previous record for operating income was JPY 129.6 billion in the fiscal year ended March 2008. For the 3 months of the fourth quarter, the impact of U.S. dollar yen exchange rate fluctuations on ordinary income is expected to be an increase or decrease of JPY 400 million for every JPY 1 change in the exchange rate. For every USD 10 change in the bunker price per metric ton, there will be an impact of approximately JPY 10 million. Most of the increase in fuel oil prices is covered by the bunker adjustment factor.
Turning to shareholder returns. We have increased the fiscal year-end shareholder dividend by JPY 50 to JPY 150 per share, up from the previous forecast of JPY 100 per share. Since we have already paid an interim dividend of JPY 100, we expect a full year dividend of JPY 250. Moreover, we expect to increase the dividend in fiscal 2024 by providing a full year dividend of JPY 250 per share. We also plan to carry out a stock split. I will explain the shareholder returns in more detail when we get to Page 13.
B2. Forecasts for fiscal year 2023 by segment. Looking at the full year forecast by segment, the ordinary income forecast is JPY 5.5 billion for Dry Bulk and JPY 7.5 billion for Energy Resource Transport. Product Logistics overall is JPY 128.5 billion. Of this amount, containership business accounts for JPY 45 billion, and product logistics, excluding Containership business accounts for JPY 83.5 billion.
The differences from the previously announced figures are that Dry Bulk has been revised downward by JPY 3 billion. Energy Resource Transport has been revised downward by JPY 0.5 billion, and Product Logistics has been revised upward by JPY 3.5 billion. Overall, ordinary income remains unchanged from the previously announced figure. Compared to the same period last year, profits decreased for Dry Bulk, Energy Resource Transport and Containership business.
Meanwhile, Product Logistics, excluding Containership business shows an increase year-on-year with ordinary income expanding to JPY 83.5 billion centered on car carrier business. Looking at full year ordinary income for Product Logistics, excluding Containership business, we are forecasting a significant 37% increase compared to fiscal 2022, growing from JPY 61.1 billion to JPY 83.5 billion.
We have been able to maintain overall ordinary profit at JPY 135 billion, unchanged from the previously announced figure. Compared to the previously announced figure, Dry Bulk has been revised downward by JPY 3 billion. This is mainly due to temporary causes and a combination of factors. These include delays and congestions due to restrictions on passage through the Panama Canal and delays due to stormy weather and a temporary increase in some general and administrative expenses. The downward revision of JPY 0.5 billion for Energy Resource Transport is also primarily due to a onetime occurrence of general and administrative expenses. Meanwhile, Containership business has been revised upward by JPY 2 billion compared to the previous announcement. In the third quarter, containership liftings and freight rates fell more than expected. In the fourth quarter, however, there is widespread market awareness that supply chains are becoming strained due to tensions in the Middle East.
With the rapid rise in freight rates, the profit outlook for the fourth quarter should exceed the losses in the third quarter. While the total ordinary income for the third quarter was JPY 13.2 billion, it is expected to increase significantly in the fourth quarter with a forecast of JPY 36.6 billion. This is a result of the one-off losses I explained earlier, being concentrated mainly in the third quarter. Please note that the situation will return to normal in the fourth quarter.
Next, I will provide a qualitative overview for each of our businesses. For dry bulk, market conditions remain soft for Capesize vessels due to the easing of port congestion starting around the fourth quarter of last fiscal year. Since the fall last year, demand has increased for iron ore from Australia and Brazil, bauxite from Africa and coal from Colombia to China. The market has been volatile with occasional spikes in prices.
Market conditions for Panamax and smaller sizes declined at the beginning of the fiscal year due to a decline in coal and steel transport to remote destinations such as Europe. However, they have been improving since mid-August due to demand recovery for grain transport and utilization rates being lowered by factors such as delay and congestion caused by the Panama Canal drought. However, the market has been on a downward trend since the New Year holiday.
In the Energy Resource Transport segment, most of the vessels in operation are under medium- and long-term contracts and the impact of current market conditions is extremely limited. Assuming no negative exchange rate impacts or one-off expenses that affect profits, like those I mentioned earlier, we believe that the forecast figures will remain unchanged.
For Car Carrier business, which is part of Product Logistics, automaker production cuts due to parts and semiconductor shortages have already eased. Automakers have not yet cleared back orders, but cargo volumes are steady and export demand is expected to remain high. The demand for car transport to North America is particularly strong. And at the end of 2023, transport space for 700,000 units of cargo was being sought in the Pacific region.
On the other hand, we have recently heard that inventories of Chinese OEM vehicles, which have been growing in number, are increasing in various places. We will need to monitor the situation to see whether the export offensive will continue. We estimate that the number of automobiles transported by "K" LINE in fiscal 2023 will be JPY 3.314 million. In fiscal 2019, however, it was JPY 3.328 million. Accordingly, we have finally returned to the pre-COVID level of 2019. ONE's Slides 3, fiscal year 2023 full year forecast. Regarding the Containership business portion of Product Logistics, ONE's full year results for fiscal 2023 and profit after tax will be USD 856 million or approximately JPY 120 billion. Since "K" LINE has a 31% stake in ONE, our portion will be approximately JPY 37.2 billion. This is an increase of $5 million from the previous forecast figure.
Compared to the same period last year, profit was down USD 14.142 billion or about 94%. In the third quarter, supply increased due to deliveries of new ships and cargo movements from China did not increase after China's National Day in October. Despite multiple attempts to restore freight rates, no improvement occurred. As a result, both liftings and freight rates for the third quarter were lower than originally forecast.
Since the start of the fourth quarter, short-term freight rates on Asia-North America and Asia-Europe routes have been experiencing a temporary and significant increase. This is due to the anticipated tight supply chain caused by the current situation in the Middle East. With European and Mediterranean services that usually pass through the Suez Canal, now detouring around the Cape of Good Hope, we expect this situation to continue until around March.
Based on this premise, freight rates will remain high for now. However, we are creating an earnings plan based on the assumption that freight rates will level out after reaching their peak in February, the Chinese New Year month, with a clearer picture of the situation. Accordingly, if the safety of the shipping route through the Suez Canal is not secured as quickly as expected, the tight supply situation may not improve and freight rates will possibly remain high.
B3. Key factors for "K" LINE's own businesses in fiscal year 2023. Full year results comparison with the previous year. Compared with the ordinary income of "K" LINE's own businesses, excluding Containership business in fiscal 2022, which was JPY 89.2 billion before deduction of overhead costs, the current fiscal year will see an improvement to JPY 96.5 billion.
However, the foreign exchange impact was JPY 13.5 billion, which, together with improvements in product logistics of JPY 14.1 billion, offset the negative impact of Dry Bulk and Energy Resource Transport results. B4. Responding to limits on the number of vessels passing through the Panama Canal and avoidance of the Suez Canal due to the deteriorating situation in the Middle East. I will now go over the avoidance of the Suez Canal due to the situation in the Middle East and restrictions on transit through the Panama Canal. Starting chronologically, the situation with the Suez Canal began on October 7, 2023, when Hamas launched its attack on Israel.
On November 19, a car carrier sailing through the Red Sea was captured by Houthi forces from Yemen. In response to this, starting around mid-December, containerships and some car carriers, in particular, began changing their routes to avoid the Suez Canal and sail around the Cape of Good Hope instead. On January 11, 2024, U.S. and British Forces launched air strikes on Houthi strongholds in the Yemen. As a result, the Cape of Good Hope root has become the normalized option.
At the beginning of November, the average number of vessels passing through the Suez Canal was approximately 74 per day, but the number is now approximately 46 vessels per day, a decrease of about 40%. Also, according to Clarkson's Research, the number of ship arrivals in the Gulf of Aden during the 7 days prior to January 26, decreased by 68% compared to the level seen in the first half of December last year, and it came to approximately 40%. Looking at the situation for vessel arrivals by type, liquefied gas carriers, car carriers and containerships have decreased by approximately 99%, 96% and 90%, respectively, indicating a significant decline in arrivals for these types of ships. Containership freight rates, which are especially sensitive to market conditions, were USD 2,861 FEU on the routes from Shanghai to Europe for the week ending January 26, according to the Shanghai Containerized Freight Index, SCFI. This is about 2.8x higher than in mid-December.
Regarding the effect of the avoidance of the Suez Canal, by detouring around the Cape of Good Hope, voyage times are extended by about a week to 10 days each way. Since the cost of these detours and the cost of rising insurance premiums to cover war risks are upfront costs, the negative impacts will first show up on the bottom lines of shipping companies.
Over the medium term, this may become a factor that inhibits the supply of ships, resulting in upward market pressure on freight rates and charter hire or a revision of freight rates based on discussions between shipping companies and customers. We believe that these changes will be reflected in the bottom line of shipping companies around the second half of the fourth quarter.
Turning to the Panama Canal. Due to the current El Nino event, 2023 turned out to be Panama's lowest rainfall year on record. As a result, Lake Gatun, which supplies the water needed for the canal to operate, has dropped to a low level. Restrictions on the number of vessels allowed to pass through the canal have been in place since July 2023. Previously, the maximum daily number of ships passing through the Panama Canal was about 36, with 31 reservations available per day. The number of available reservations decreased to 24 in late November and 22 in December. Consequently, the number of vessels transiting the canal has fallen to 2/3 of the usual level. This number has recovered slightly to around 24 reservations as of January 16, but there is now a limit of 1 ship per day per shipping company.
Because of this, starting around December, some shipping companies rerouted vessels from the Panama Canal to the Suez Canal for West bound transit. Now due to problems with the Suez Canal, companies are forced to further detour around the Cape of Good Hope.
C. Status and progress of medium-term management plan.
C1. Capital policy. Capital policy progress and corporate value improvement. Now I would like to explain our capital policy KPIs and provide an overview of the achievement progress. We are steadily achieving our operating cash flow forecast of JPY 1.2 trillion. It also seems likely that we will reach our fiscal 2026 ordinary income target of JPY 140 billion ahead of schedule. Accordingly, we intend to revise upward our profit level target of JPY 140 billion in ordinary income for fiscal 2026. We are currently in the process of finalizing this matter internally and plan to announce the new target in May 2024.
We are promoting an investment cash flow of JPY 630 billion without compromising investment discipline. "K" LINE is also actively implementing shareholder returns of JPY 500 billion or more, which I will explain in more detail later. Moreover, we have recently achieved our PBR target of 1.0 or more. However, our objective goes beyond just having a PBR of 1. It also includes an optimal capital structure, a new shareholder return policy and an update of our growth strategy centered on the 3 businesses that will drive growth, and we expect to announce a comprehensive plan in May 2024, together with the ordinary income target update that I just mentioned. To achieve our ROIC target of 6% to 7% for fiscal 2026, we will emphasize capital efficiency, cash flow and portfolio selection. We would like to pursue this by focusing on ROIC, WACC, EVA and other related metrics as KPIs for each business division.
C2. Capital policy. Shareholders' return policy. The previous annual dividend forecast for fiscal 2023 was JPY 200 per share, including a basic dividend of JPY 120 and an additional dividend of 8. For this fiscal year, an additional JPY 50 will be added, resulting in an annual dividend of JPY 250. Since we have already paid an interim dividend of JPY 100 per share, the year-end dividend will be JPY 150 to reach JPY 250 per share.
For fiscal 2024, the previously announced figure was only JPY 120 per share as a basic dividend. An additional dividend of JPY 130 per share will be added, resulting in an annual dividend of JPY 250 per share, thereby matching the fiscal 2023 dividend. Total shareholder returns for fiscal 2021 onwards, including forecasted returns, will be JPY 484.2 billion. This is close to the JPY 500 billion that is indicated in the medium-term management plan.
However, since our medium-term management plan actually stipulates a goal of JPY 500 billion or more, we will continue to consider ways to return more than JPY 500 billion to shareholders going forward. The basic approach regarding the dividend increases for fiscal 2023 and 2024 has not changed. It is part of our policy, which remains unchanged, that we proactively return profits to shareholders based on cash flow, and we return any portion that exceeds appropriate capital.
One reason that JPY 250 is the dividend for this and next fiscal year is that we want to provide predictably stable dividends. We announced to our shareholders that not only will we increase the dividend for the current fiscal year, but also for the next fiscal year, thereby indicating no risk of a dividend reduction in the next fiscal year.
Also, please understand that we have not decided on a new dividend calculation formula, but rather, we decided to provide shareholder returns at this level based on a comprehensive determination. We also took into account the market expectations for dividend yield, along with the yield of investment vehicles compared to stocks, such as U.S. bonds.
Furthermore, we plan to split each share of "K" LINE common stock into 3 shares effective April 1 of this year. This is because while our stock price is rising, the TSE stock price guidelines require that the investment unit price, i.e., the price for the minimum investment amount, in our case, 100 shares, be less than JPY 500,000. Therefore, we are performing the stock split in accordance with this.
The stock split is also being made to take into consideration the anticipated demand for Nippon Individual Savings Accounts, NISA, the new Japanese government's tax restock investment program introduced this year.
C3. Changes in the business environment. Among the current business risks for 2024, there is economic separation, particularly due to the conflict between the U.S. and China, Russia's war in Ukraine, conditions in East Asia, including North Korea and Taiwan and the situation in the Middle East, which were described in the topic of economic decoupling. We believe that political uncertainty in various countries will be a larger factor than any other risk. In particular, the topics I just covered will have a major direct impact on the performance of our industry. These include avoidance of the Suez Canal due to a security crisis in the Red Sea, the need to detour around the Cape of Good Hope and the likelihood of the Panama Canal returning to normal operations. We plan to pay close attention to these factors.