Nomura : Outlook for FY21-22 corporate earnings(PDF 1,141KB)

News Release

Outlook for FY21-22 corporate earnings

Quarterly Update

6 December 2021

For inquiries:

Market Strategy Research Dept

Equity Research Dept

Nomura Securities Co., Ltd.

Nomura | JPN Outlook for FY20-21 corporate earnings	December 6, 2021

Contents

Summary and major assumptions........................................................	3
Contributions to recurring profit growth by sector.................................	5
Revisions to recurring profit estimates (versus old estimates) .............	7
Revision index for the Russell/Nomura Large Cap Index .....................	9

Reference
Russell/Nomura Large Cap Index: earnings indicators ......................	10
Recurring profits by sector.................................................................	12
Percentage change in quarterly sales and profits ..............................	13
Valuation indicators ...........................................................................	14
What are the Russell/Nomura Japan Equity Indexes? .......................	15

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Nomura | JPN Outlook for FY20-21 corporate earnings	December 6, 2021

Summary and major assumptions

Overview of the corporate earnings outlook for FY21

Our analysts' forecasts put FY21 sales growth for Russell/Nomura Large Cap companies at 12.3% y-y, operating profit growth at 56.4%, recurring profit growth at 32.3%, and after-tax profit growth at 34.0% (sales and operating profit figures exclude financial companies, same throughout this report). Excluding SoftBank Group [9984], which generated large profits in its investment fund operations in FY20, our analysts call for recurring profit growth of 49.2% and after-tax profit growth of 60.5% in FY21.

Overview of the corporate earnings outlook for FY22

Our analysts' forecasts put FY22 sales growth for Russell/Nomura Large Cap companies at 5.1% y-y, operating profit growth at 13.3%, recurring profit growth at 10.3%, and after-tax profit growth at 10.9%. The average annual recurring profit growth rate for the five years prior to the pandemic (FY13-18) was 4.7%. We forecast stronger profit growth than this in both FY21 and FY22.

In terms of companies for which comparable recurring profit data is available for the past ten years, we expect recurring profits to be 11.9% higher than their previous peak (in FY18) in FY21, and 23.7% higher in FY22.

The process of earnings recovery from the COVID-19 pandemic has been accompanied by supply chain tightening in the form of semiconductor shortages and rising input costs, and concerns have also emerged that the Chinese economy might be peaking. We lower our FY21 recurring profit forecast for the automobile sector to reflect reduced output, and lower our FY22 recurring profit forecast for the steel & nonferrous metals sector to reflect rising input costs and falling steel prices.

However, supply constraints can also boost margins too. We raise our FY22 recurring profit forecast for the automobile sector on the prospect that supply shortages will enable it to rein in incentives. Within the chemicals sector, PVC spreads have benefited from curbs on output caused by hurricanes in the US and electricity restrictions in China. With Nomura analysts also now assuming a weaker yen than before, we raise our overall outlook for corporate earnings. Our analysts' recurring profit forecasts for FY21 and FY22 have been revised up 3.2% and 2.7% respectively since the last time we compiled analysts' forecasts on 1 September.

However, this represents slower momentum in upward revisions to recurring profit forecasts for FY21 and FY22 than the equivalent increases of 7.5% and 3.6% respectively between 1 June and 1 September. While this is partly a consequence of recurring profits already being so high in absolute terms, it also looks as though upward revisions to the earnings outlook may have lost steam. Future points to watch in terms of gauging upside scope for earnings will probably include: (1) supply chain developments; (2) fresh acceleration in external demand, especially in China; (3) new COVID variants and their impact in Japan and globally; and (4) corporate initiatives to boost margins.

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Nomura | JPN Outlook for FY20-21 corporate earnings	December 6, 2021

Fig. 1: Overview of consolidated earnings forecasts for the Russell/Nomura Large Cap Index

Note: Latest estimates as of 1 December 2021, previous estimates as of 1 September 2021.

Source: Nomura

Fig. 2: Major assumptions

Note: WTI is term-average WTI crude oil futures price. The above assumptions are not Nomura forecasts but the assumptions on which Nomura analysts base their earnings forecasts.

Source: Nomura

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Nomura | JPN Outlook for FY20-21 corporate earnings	December 6, 2021

Contributions to recurring profit growth by sector

Overview of the corporate earnings outlook for FY21

For FY21, our analysts expect recurring profits to increase in 16 of 19 sectors and fall in 3.

Sectors expected to make large contributions to overall profit growth include trading companies, automobiles, transportation, and chemicals.

Trading companies should benefit from rising prices for resources such as coking coal and crude oil, and earnings have also been solid in non-resource operations such as automotive and lifestyle-related business. Automakers have been recovering from the effects of the pandemic, and financing operations are improving thanks to rising used car prices and lower discounts. While automakers have had no choice but to reduce production because of semiconductor shortages and supply chain issues caused by the pandemic, we think production by the Japanese automakers will essentially return to normal in December. In the transportation sector, passenger numbers have started to recover as a result of the lifting of the state of emergency declaration and progress with the vaccination rollout. In the shipping subsector, containership volumes are up, particularly on North America routes, and rates are high. In the chemicals sector, the oil subsector should benefit from high crude oil prices, and PVC-related business is also doing well. Demand is robust in the US and India, and margins have improved rapidly as a result of the hit to production from Hurricane Ida in the US and restrictions on electric power in China.

Sectors expected to see declines in profits are telecommunications, utilities, and construction.

For telecoms, the main factor here is the dropping out of investment gains booked in FY20 at SoftBank Group. Excluding SoftBank Group we forecast profit growth for the sector overall. For utilities, companies are expected to incur losses related to the fuel cost adjustment system, and major electric power and city gas companies are expected to continue to lose business to other companies. In construction, competition for major projects remains fierce, and building construction gross margins have been low because of lower margins at the time of order receipt since FY18 warrants attention.

Overview of the corporate earnings outlook for FY22

For FY22, our analysts expect recurring profits to increase in 15 of 19 sectors and fall in 4.

Sectors expected to make large contributions to overall profit growth include automobiles, transportation, electrical machinery & precision instruments, and finance.

For the autos industry, we forecast a 13.8% y-y increase in auto production in Japan in FY22 as production normalizes. Japanese automakers have the advantage when it comes to semiconductor procurement, and we look for expansion in market share in major markets such as Europe, North America, and China in 2022 H1. US shipments are likely to hit an unprecedented 19.8mn vehicles in 2022, partly because of inventory stockpiling at dealers. In transportation we look for a continued recovery in passenger traffic. In the air transportation subsector, we expect a real recovery in international travel. For electrical machinery & precision instruments, we expect demand for semiconductors to remain strong, particularly for automotive and industrial applications, and the market for semiconductor production equipment also looks likely to keep growing in FY22. In the finance industry, we expect an increase in income from the sale of financial products and a rise in corporate fees and commissions, as well as a drop in credit costs on a pullback from precautionary reserve provisions and an upshift in borrower credit ratings.

Sectors expected to see profit declines are trading companies, steel & nonferrous metals, services, and media.

For trading companies, we expect profit declines in resource fields caused by factors such as a drop in prices for iron ore. In non-resource areas as well, we expect the boost from higher prices for a wide range of products caused by COVID-related supply shortages to drop out of the picture. In steel & nonferrous metals, we expect profit declines from deterioration in inventory valuation gains/losses. In services, we look for a decline in mail, and a slowdown in sea & ocean freight forwarding business with shipping rates stabilizing. For the media sector, we expect y-y performance to be hit by the drop-out of gains on the transfer of fixed assets that we expect to see recorded in FY21.

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