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Elevator Pitch
I continue to award a Buy rating to Sumitomo Mitsui Financial Group, Inc. (NYSE:SMFG) [8316:JP] stock. The potential for growth in SMFG’s net interest income and asset management fees was the subject of my earlier February 25, 2024 write-up.
The latest article looks at the positive read-throughs from Sumitomo Mitsui’s recent disclosures, which support a Buy rating for the stock. SMFG’s recent fiscal year bottom line and its guidance for the new fiscal year surprised on the upside. The company also has plans to return excess capital to shareholders.
Above-Expectations Results And Guidance
On May 15, 2024, before the market opened, Sumitomo Mitsui issued a 6-K filing announcing its FY 2023 financial results and FY 2024 management guidance. On its investor relations website, SMFG refers to fiscal 2023 as the time period between April 1, 2023 and March 31, 2024.
Net profit attributable to shareholders for SMFG increased by an impressive +19% YoY from JPY806 billion for fiscal 2022 to JPY963 billion in the most recent fiscal year ended March 31, 2024. Sumitomo Mitsui’s latest fiscal year bottom line came in +3% higher than the sell side’s consensus forecast of JPY937 billion (source: S&P Capital IQ). SMFG’s actual FY 2023 earnings also beat the company’s management guidance of JPY920 billion by +5%.
In its 6-K filing published on May 15, the company attributed its excellent FY 2023 results to the “recovery of the business result at SMBC Nikko Securities (securities brokering business), the strong performance of Sumitomo Mitsui Card Company (credit cards business), and increases in interest income.”
In specific terms, net fees and commissions for SMBC Nikko Securities and Sumitomo Mitsui Card Company grew by +44% and +13% to JPY226 billion and JPY446 billion, respectively in the latest fiscal year. Separately, Sumitomo Mitsui’s net interest income rose by +10% to JPY1,881 billion for FY 2023.
Moving forward, Sumitomo Mitsui anticipates that the company can record a net income attributable to shareholders amounting to JPY1,060 billion for FY 2024 (April 1, 2024 to March 31, 2025). This translates into a reasonably good bottom line expansion of +10% for the new fiscal year. Furthermore, SMFG’s FY 2024 earnings guidance was +7% better than the analysts’ consensus estimate as per S&P Capital IQ data.
In the company’s FY 2023 earnings presentation slides, SMFG highlighted that its FY 2024 bottom line guidance will be supported by a “favorable business environment.”
I previously mentioned in my late-February 2024 article that “it will be realistic to think that there is a rate hike for Japan on the cards” which “can potentially boost SMFG’s net interest income.” Seeking Alpha News reported on March 18, 2024 that “the Bank of Japan (BOJ) has raised its benchmark interest rate by 0.1%” which represents “the first hike in 17 years.” In other words, Sumitomo Mitsui was most probably referring to the recent rate hike when it drew attention to “the favorable business environment” which boosted its FY 2024 prospects.
Valuation Re-Rating Moves In The Spotlight
The market is now valuing Sumitomo Mitsui at 0.88 times trailing P/B based on data taken from S&P Capital IQ.
With my prior February 25, 2024 update, I valued SMFG at 1.08 times P/B using “ROE, perpetuity growth rate, and cost of equity assumptions” of “8.5%, 2%, and 8%”, respectively. My valuation utilizes “the Gordon Growth Model” that “calculates the P/B ratio as ROE minus perpetuity growth rate divided by the cost of equity minus perpetuity growth rate.”
My new P/B target multiple for Sumitomo Mitsui is 1.17 times, which is +33% higher than its current P/B ratio of 0.88 times. I have kept the perpetuity growth rate and cost of equity assumptions unchanged. But I have revised my ROE assumption upwards from 8.5% to 9.0%. This takes into the firm’s new long-term ROE goal of 9% (source: FY 2023 earnings presentation slides).
There are a number of re-rating drivers for SMFG, considering the company’s plans.
Firstly, SMFG has guided for a substantial +22% increase in dividend per share distribution to JPY330 for the new fiscal year or FY 2024 ended March 31, 2025. This is equivalent to a decent forward dividend yield of approximately 3.5%.
Secondly, the company revealed a new JPY100 billion share buyback plan for the May 16, 2024 to July 31, 2024 time frame. This represents about 1% of Sumitomo Mitsui’s current market capitalization. In its FY 2023 earnings presentation, SMFG also emphasized that it “will consider additional purchases flexibly during the fiscal year.”
Thirdly, Sumitomo Mitsui disclosed a proposed 3-for-1 stock split that is expected to take effect on October 1 this year. In its announcement, the company explained that this move is to “develop a more investor-friendly environment and expand the investor base.” Based on the Tokyo Stock Exchange’s minimum lot size of 100 shares, individual investors have to fork up around $6,000 (my estimate) to buy a single lot of Sumitomo Mitsui’s Japan-listed shares with the 8316:JP ticker. It is clear that Sumitomo Mitsui wishes to encourage more Japanese individual investors to take a position in its Japan-listed shares with a lower minimum investment amount following the planned stock split.
In a nutshell, initiatives to return capital to shareholders (buybacks and dividends) and attract new investors (stock split) are positive moves that could help to drive a favorable re-rating of SMFG’s valuations.
Variant View
Under certain scenarios, it will be tough for Sumitomo Mitsui’s P/B valuation multiple to expand.
The performance of SMFG’s financial services businesses is dependent on the health of the economies in Japan and other international markets. If economic growth slows, Sumitomo Mitsui’s future financial performance might be adversely affected, notwithstanding the positive interest rate environment for Japan.
Also, Sumitomo Mitsui’s shares could take a hit, assuming that the company’s actual shareholder capital return in the form of dividends and repurchases for the new fiscal year falls short of its guidance.
Concluding Thoughts
SMFG’s latest disclosures point to multiple positives for the stock. The company has the intention to entice new shareholders with its planned stock split, and it aims to reward existing shareholders with higher dividends and a new buyback program. Sumitomo Mitsui’s FY 2023 earnings and FY 2024 guidance were also positive surprises.
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