Business Portfolio Evolving; New Sustainable Growth Phase

Research evidence excerpt

Business Portfolio Evolving; New Sustainable Growth Phase

IdeaMNear-term earnings forecasts: Tokuyama has not yet issued F3/27 guidance. We forecast

F3/27 OP of ¥40bn (+8% YoY), below our previous estimate of ¥44bn mainly because we

expect the sale of cement sales rights to reduce 2H OP by ¥2.5bn. By quarter, we forecast

OP of ¥10bn (+27% YoY) for 1Q, ¥9.5bn (-16%) for 2Q, ¥9bn (+19%) for 3Q, and ¥11.5bn

(+12%) for 4Q. In 1Q, we expect spreads to widen as Tokuyama raises prices for chemicals

in line with higher spot raw material prices while lower-cost raw material inventories are

drawn down and booked as cost of sales. In 2Q, we expect a reactionary decline as F3/26

2Q profit was boosted by a one-off gain from the reversal of valuation losses. The impact

of higher raw material costs is also likely to become more visible. In 3Q and 4Q, we expect

lower earnings from Cement, but substantial profit growth in the Electronic & Advanced

Materials and Life Science segments.

Longer-term earnings forecasts: We assume Tokuyama will stop cement production from

October 2028 onward. We forecast OP of ¥44bn (+10% YoY) for F3/28, ¥46bn (+5%) for

F3/29, ¥49bn (+7%) for F3/30, and ¥53bn (+8%) for F3/31. While our projected OP CAGR

for F3/26-F3/31 is 7%, we estimate a 14% CAGR for earnings from continuing operations

excluding cement. The loss of cement, which accounts for roughly one-quarter of OP, is

not insignificant, but we expect Electronic & Advanced Materials and Life Science to

continue expanding and to generate nearly 90% of OP by F3/31. Within Electronic &

Advanced Materials, we believe materials other than polysilicon are expanding rapidly

while improving profitability, and we do not think this is sufficiently reflected in the share

price. We reaffirm our Overweight rating.