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Can the World’s Largest Carmaker Handle the ESG Pressure?

Do you own Toyota?

Highlights:

  • EV skepticism could become costly in woke environment
  • Demand rebound makes up for lost production
  • Ongoing share repurchase program keeps returns alive


Download the full report as a PDF


Toyota’s revenue breakdown 2021

EV skepticism could become costly in woke environment

  • Toyota’s president is well known for his critical attitude towards electrification of cars
    • Toyota has been the long-term leader in hybrids, but is way behind in full EVs
  • In 2020, the Japanese gov’t announced the intention to ban gasoline-powered cars by 2030
  • Akio Toyoda responded that large parts of the world are not ready for EV yet
    • “When politicians are out there saying, ‘Let’s get rid of all cars using gasoline,’ do they understand this?”

Falling behind competitors in battery development

  • Toyota has announced to allocate US$13.5bn by 2030 to the development of EV batteries
  • This amount is much lower than its competitors who are investing more than double in half the time

Betting on the wrong horse?

  • The company continues to bet on hybrid models rather than full electric cars
  • It argues that there is no difference in environmental benefits
    • The manufacturing of batteries still causes too much pollution
    • Most of energy cannot be supplied by renewable sources

Demand rebound makes up for lost production

  • Strong demand from the US and Asia brings car sales almost back to normal by March 2022
    • All production plants have returned to full capacity
  • Management forecast the company should return to 10m vehicles by the end of 2023
    • The target might be a bit ambitious

Ongoing share repurchase program keeps return alive

  • In 1997, Toyota implemented its flexible share repurchase program
  • Despite the pandemic, it stuck to its strategy
    • The company announced that by March 2022, it will buy back shares worth JPY150bn ($1.3bn)
  • The repurchase has helped to keep return on equity above its target of 10%

FVMR Scorecard – Toyota

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Consensus remains optimistic regarding carmaker recovery

  • Analyst consensus does not see much further upside
    • The stock price has shown strong momentum recently
  • They expect a strong recovery in global car sales

Get financial statements and assumptions in the full report


P&L – Toyota

  • Toyota has shown a strong 1H22, with revenue aiming to hit JPY30trn by the end of the reporting period
  • We expect that the company benefits further from post-pandemic recovery

Balance sheet – Toyota

  • The company has a solid cash position, holding around 12.5% of its assets in cash
  • Net fixed assets grow in line with revenue
    • Expansion of its existing production plants
    • Investment in battery development
  • The item “Other” contains the treasury stock
    • It is deducted from equity when the company buys back its own shares
  • For 22E, the company set the buyback program to JPY 150bn
  • We forecast buybacks to continue in the future as well

Cash flow – Toyota

  • Operating cash flows were not able to cover investing activities in 2020 and 2021
  • That should improve in 2022
  • The company pays out dividends on a consistent basis
    • Slowly growing over time
    • Dividend payout ratio is almost constant around 30%

Ratios – Toyota

  • Revenue was hit during the pandemic
  • The global car industry rebounded; however, semiconductor shortages constrained growth in the short run
    • This comprises a short-term drag on margins
  • The company targets to keep its ROE around 10% (with the help of its buyback program)
  • Toyota is among the most consistent and most profitable car makers in the world
    • Competitors like VW and GM only achieve EBIT margin between 5 and 7%
  • The company has moderately high leverage

Free cash flow – Toyota

  • FCFF remained positive throughout the pandemic
  • High investment expenditures require a consistent generation of strong operating cash flows
  • It also needs recurring cash to continue its share buyback program which is an important element in the company’s strategy

Value estimate – Toyota

  • Global car sales likely to see strong rebound over the next 3 years
  • Profitability is suppressed in the short run by higher raw material prices and semiconductor shortages

World Class Benchmarking Scorecard – Toyota

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is adverse regulatory changes

  • Ongoing supply chain disruptions create shortages (e.g., semiconductor chips) and increase production costs
  • Failure to keep up with technological changes could result in loss of market share
  • Adverse regulatory changes that push for electric vehicles only policy

Conclusions

  • Production is on track and could lead to record profits
  • Solid dividend and share buyback offer attractive return even without upside
  • In the long run, Toyota must sooner or later shift to EV

Download the full report as a PDF


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