Japan: Rosy corporate earnings outlook for FY17 - Nomura

For FY17, Nomura’s analysts look for Japanese sales growth of 3.3% y-y and recurring profit growth of 12.0% for companies in the Russell/Nomura Large Cap Index (ex financials).

Key Quotes

“The current figures represent upward revisions of 0.2ppt for sales growth and 1.7ppt for recurring profit growth versus our previous forecasts. Our forex assumptions for FY17 are USD/JPY of 103.0 (previously 105.0) and EUR/JPY of 114.0 (previously 116.0). Our WTI assumption is $50.0/bbl ($45.0/bbl). The revision index for forecast recurring profits (ex financials) is slightly negative at -0.7%, with more or less an equal number of upward revisions and downward revisions.”

“The average ROE for Russell/Nomura Large Cap Index stocks was 7.7% in FY15, and we now forecast 8.3% in FY16 (breaking above the "bare minimum" of 8%) and 8.6% in FY17. This is still a long way off from the recent peak of 10.1% in FY05.”

“For FY17, we project that recurring profits will increase in 16 of the 19 sectors and decrease in three.”

“Sectors from which we expect large contributions to overall profit growth include electrical machinery & precision equipment, automobiles, steel & nonferrous metals, chemicals and machinery. We expect the rapid appreciation of the yen to quiet down in FY17, and assume that macroeconomic conditions will be relatively stable. The government has already decided to put off an additional consumption tax hike, and we expect a positive boost to the economy from the government's large-scale economic stimulus package. Against this backdrop, we expect the negative effects of yen depreciation to drop off and expect a return to profit growth, particularly in the manufacturing sector.”

“We expect profits to decline in the utilities, financials, and media sectors. While we expect recurring profits to fall in the financials and media sectors, we believe that profits will basically remain in flat territory. We expect earnings in the utilities sector to be hobbled by a rise in fixed costs, which sector companies have been working to keep down.”

“We have raised our FY17 recurring profit forecasts for 10 of the 19 sectors and lowered them for nine.”

“The largest upward revisions were for our estimates for sectors such as trading companies and chemicals, while the largest downward revisions were to our forecasts for sectors such as automobiles, machinery, and pharmaceuticals & healthcare. Many of the factors behind the revisions to our FY17 forecasts are in step with changes to our FY16 estimates. The upward revision to our estimate for the chemicals sector is largely to factor in profit contributions from new projects in the oil products subsector, while the downward revision to our estimate for the pharmaceuticals & healthcare sector reflects the impact from lower drug prices at certain companies. Company-specific factors played a large role in both of these revisions. For the machinery sector, the extent of the downward revision to our FY17 estimate was less than the downward revision to our FY16 estimate as the earnings deterioration in FY16 was largely due to temporary increases in costs.”