Mitsui Stock Q1: Off To A Slow Start (OTCMKTS:MITSF)

Fiscal Q1: A Little Behind Plan

Mitsui & Co. (OTCPK:MITSY) (OTCPK:MITSF) was one of the 4 Japanese trading companies to report Fiscal 2025 Q1 earnings this week. Itochu (OTCPK:ITOCY) (OTCPK:ITOCF) follows on 8/5. As I discussed last quarter, Mitsui’s FY 2025 plan is for ¥900 billion net income, a lower result than FY 2024 actuals, after several years of commodity-led growth. The company also planned to have ¥1 trillion of core operating cash flow this year. The actual Q1 results show that Mitsui delivered 22% of the annual core operating cash flow plan in Q1, a bit under ratable delivery of 25%. Progress against the profit target was 31%, but this was due mostly to gains on sale of two businesses in the Machinery & Infrastructure segment. Without these gains, profit also would have been around 22% of the annual plan.

Mitsui lags its 3 peers who have reported on core operating cash flow. It is making average progress in terms of profit, but the other companies have one-off gains and losses as well.

	Profit	COCF
MITSY	31%	22%
MSBHF	37%	33%
SSUMY	24%	29%
MARUY	30%	32%

Click to enlarge

Mitsui stock performance since last quarter has been in the middle of the pack, but negative, justifying my Hold rating. Itochu has been the standout performer on share price.

As we see on the first chart, a few segments are ahead of ratable plan delivery, while a couple of others are dragging down the company average. Let’s look at the key drivers to see if Mitsui can catch up and deliver the plan this year.

Key Drivers For Plan Delivery

With all the moving parts involved in a trading company, I find that the waterfall chart in the earnings presentation is the quickest way to zero in on what is working and what is holding the company back. This chart compares Q1 2025 to Q1 2024.

As I mentioned at the start, gains on asset sales overwhelmed any operational changes this quarter. Mitsui sold two businesses in the Machinery & Infrastructure segment. The first was its remaining stake in PT Paiton Energy, a coal-fired power plant in Indonesia. Mitsui had been working on getting out of this business since 2022 in order to improve the greenness of its power generation portfolio. Second was the sale of part of Mitsui’s stake in VLI, a Brazilian intermodal freight transporter. Last year, Mitsui had a mark-to-market gain when it took full control of call center operator Aim Services. Netting these out the one-time gains in Q1 2025 were ¥30 billion more than in Q1 2024, more than accounting for all of the profit growth.

Mitsui’s biggest segment, Mineral and Metal Resources, is on plan for the year. Volumes of iron ore are up from Q1 of last year, although the full year forecast is still flattish to last year’s total. Iron ore prices have been stable so far this year and slightly below last year’s average in USD terms. Unfortunately, forecasters are predicting declines through the rest of 2024 and even out to 2027. So far this year, the weaker yen has completely offset the lower USD price in Mitsui’s results. Looking forward, the yen has been strengthening, which would be another headwind to Mitsui’s profits in JPY terms. As Mitsui’s highest-volume commodity, iron ore prices present one of the biggest risks to plan delivery.

Energy is Mitsui’s second largest segment, and it was significantly under ratable plan pace in Q1. LNG prices were a headwind, although they appear to be trending upward. LNG is expected to get the Energy segment back on plan in the second half of the year. Longer term, LNG is key plank in Mitsui’s cleaner energy transition. In July, the Ruwais LNG project in the UAE was approved. Mitsui has a 10% stake in this facility. Other owners include ADNOC, BP (BP), Shell (SHEL), and Total (TTE). Once Ruwais is online, it will bring Mitsui’s owned share of LNG production from all facilities to 9 million tons per year. Along with another million tons from Mitsui’s trading operations, the company will supply about 15% of Japan’s total LNG demand.

Machinery & Infrastructure is the third largest segment. The two asset sales mentioned earlier are why the YTD profit is far ahead of ratable plan delivery, but cash taxes on these gains are a drag on operating cash flow. Mitsui’s stake in Penske truck leasing was a drag in Q1, but this business is improving as I mentioned in my recent article on Penske Automotive Group (PAG). Mitsui has a couple of new acquisitions in the segment this year that will help offset the sold assets. The company invested in Taylor & Martin, a US truck auction business, and Okamoto Machine Tool Works, a maker of machine tools and semiconductor manufacturing equipment.

The rest of Mitsui’s segments make up 20-25% of the company’s operating cash flow and profits, but there are a few businesses within them worth noting. Chemicals is ahead of plan due to strong performance by animal feed additive company Novus as well as the chemicals trading operation. Within Lifestyle, the acquisitions of several different shrimp and chicken farming companies in the developing world, as well as a stake in a domestic apparel company, should help the segment get back on plan.

Overall, the cleaner, new businesses that I discussed in more detail with the medium-term plan rollout last quarter are likely to contribute to growth. Commodity prices remain the biggest risk, however.

Valuation And Capital Management

Mitsui shares in Tokyo closed at ¥3399 on the day of the earnings release. At that price, shares have a P/E of 11.2 times the FY 2025 plan earnings. On a trailing P/E basis, Mitsui is now nearly the cheapest, having lost ground to others in the past quarter.

Mitsui is still in the middle of the pack on P/B. The current P/B based on the equity value in the Q1 earnings release is 1.28.

The ¥50 per share semiannual dividend for 2025 (¥100 total) gives Mitsui a forward yield of 2.94%. Mitsui will be paying out a total of ¥298 billion in dividends this year for a payout ratio of 33%. Buybacks of ¥200 billion are still planned for FY 2025. ¥77 billion of this has been completed by the end of June. With a plan of ¥1 trillion core operating cash flow, Mitsui would have ¥502 billion available for net capex and M&A. So far this year, net capex and M&A has only amounted to ¥9 billion due to the large asset sales in Q1. That leaves sufficient cash to deliver the growth investment target in Mitsui’s medium-term management plan with about ¥200 billion remaining for additional buybacks or cushion for a shortfall in operating cash vs. the plan.

Mitsui’s net debt increased by about ¥100 billion in Q1, while equity increased ¥400 billion. Net debt/equity is now 0.44, down from 0.45 at the start of FY 2025.

Conclusion

Mitsui has faced some headwinds in the first quarter of Fiscal 2025, and this has been reflected in the downward share price over the past quarter. For the rest of the year and beyond, LNG as well as cleaner business such as food production and transportation services can help the company grow and get back on plan. Iron ore, which is Mitsui’s highest volume product, remains a risk. China appears to be scaling back on building construction as an economic stimulus tool. Falling iron ore prices would be a significant headwind, no matter how well the new growth businesses perform. Mitsui’s valuation in the middle to low end of its peer group appears appropriate for this risk, and the stock remains a Hold.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.