Toyota

Toyota, the once all-conquering leviathan is now widely seen as a corporate cripple. But we believe the company is on a comeback trail and presents an enticing investment opportunity. Kerr Neilson explains why we’ve taken a different view to the market.

Toyota, held through Toyota Motor Corp and Toyota Industries, is the largest holding in the portfolio at 3.1%. Having once been regarded as all-conquering leviathan with more cash on hand than many banks, it is now treated as a corporate cripple.

Even within the company, it is acknowledged that their former focus on size and market share was an error and under the leadership of Akio Toyoda, a descendant of the founder, the company has been on the comeback trail.

• Reporting lines have been streamlined, management layers removed and the new CEO takes personal interest in product design/development.

• Design philosophy has shifted to emphasise a more exciting driving experience, while maintaining the traditional high design standards and reliability upon which the group was built.

• In production, a modularity concept similar to that pioneered by VW is being implemented with commonality of inherent designs.  Local sourcing has been extended, and two thirds of the company’s nine million car capacity is located outside of Japan.  One third of output is in emerging markets.

• Evidence of a more open culture can be found in cooperation agreements such as those with BMW where Toyota is sharing its lithium-ion battery technology, while BMW will supply compact diesel engines.  This co-operation with BMW is now extending into hybrid drive systems and fuel cell technology.

The benefit of all these changes is still to be revealed.  Following recent refreshes of the Prius and Camry, we will see renewal of 34 models ranging from the Lexus, Crown, RAV4 and others hitting the showrooms from now until 2013.  What is undeniable, is the company is experiencing runaway sales in the important US market, up 41% and 36% year-on-year in August with both the Toyota and Lexus brands.  Presale orders for one of its new designs, the FT-86, designed in conjunction with the 16% owned associate, Subaru, go beyond anyone's expectations; the waiting list for the GTS model is 18 months.  For the current year ending in March 2013, Toyota (including subsidiaries Daihatsu and Hino trucks) plans to sell 8.8 million cars, with over 1 million of these being hybrid drives.  According to their guidance they plan to make operating profits of ¥1 trillion (more than US$12 billion) this financial year.

Of course, there are negatives which include an increasingly crowded field of car brands led by the Korean champion, Hyundai; the still-large production base in Japan and the on-going animosity between China and Japan.  This is significant given the fact that China is likely to account for around 20% of the global car market for some time to come.  There is also the negative tag of being unfriendly to shareholders, with the company sitting on cash and investments that amount to about $90 billion and compared with a market capitalisation of $125 billion.

This incidentally shows how cheap the company really is.  If one segregates the commitments of the auto finance business as a stand-alone activity, pre-tax earnings from auto manufacturing should total around US$11 billion, which on a netted-off capitalisation (market value less net cash and investments) of US$41 billion, gives a buy-out yield of 26%.  On other look-through business valuation measures, it is just as enticing.

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