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Fundamental View
AS OF 12 Dec 2022Toyota and its subsidiary issuers are the highest quality Automotive sector issuers in the dollar market with A1/A+/A+ S/S/S ratings and outlooks by Moody’s, S&P, and Fitch, respectively. Toyota’s automotive credit metrics are strong with cash and cash equivalents roughly 1.7x its debt balance. We believe its credit rating is stable with potential upside by S&P over time as the rating agency had Toyota’s rating at AA- prior to the pandemic. However, management has not indicated it aspires to a higher rating, and we note it currently has access to the Tier 1 CP market, which provides it with short-term funding flexibility.
Business Description
AS OF 12 Dec 2022- Toyota Motor Corp. (TMC) engages in the manufacture and sale of motor vehicles and parts. It operates through the following segments: Automotive, Financial Services, and All Other. The Automotive segment designs, manufactures, assembles and sells passenger cars, minivans, trucks, and related vehicle parts and accessories. It is also involved in the development of intelligent transport systems. The Financial Services segment offers purchase or lease financing to Toyota vehicle dealers and customers. It also provides retail leasing through lease contracts purchased by dealers. The company was founded by Kiichiro Toyoda on August 28, 1937 and is headquartered in Toyota, Japan.
- Toyota Financial Services Corporation (TFSC), a wholly owned subsidiary of TMC, oversees the management of Toyota's finance companies worldwide. Toyota Motor Credit Corporation (TMCC) is the company’s principal financial services subsidiary in the United States. Under terms of the credit support agreement between TFSC and TMCC, TFSC agrees to: (1) maintain 100% ownership of TMCC; (2) cause TMCC and its subsidiaries to have a tangible net worth of at least $100,000; (3) make sufficient funds available to TMCC so that it will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper. The terms of the credit support agreement between TMC and TFSC are very similar to the terms of the TFSC and TMCC credit support agreement.
Risk & Catalysts
AS OF 12 Dec 2022Although Toyota’s production volumes improved 11% sequentially during F2Q23, management lowered its FY23 production growth target from 13% to 7% due to unpredictable supplies of semiconductors and other components. It also reduced its wholesale target by 50k to 8.8 mn units, lowering its growth target from 8% to 7%.
The company announced in August it plans to build EV battery plants in Japan and the U.S., with production slated to begin in 2025. The investments imply a shift in the company’s strategy from a focus on hybrids to a more aggressive focus on EVs. Capex is up 28% YTD and management raised its full-year capex guidance to an increase of 29% versus its previous target of a 19% increase. We expect the company to generate positive free cash flow after capex in FY23 and to use its free cash flow to fund dividends and share repurchases.
While management reiterated its expectation for a 20% YoY decline in consolidated operating profit in FY23, we expect 2H23 consolidated operating profit to improve YoY on easing supply chain challenges, improved production and wholesale volumes, and favorable currency.
Key Metric
AS OF 12 Dec 2022| ¥ bn | FY19 | FY20 | FY21 | FY22 | LTM 3Q22 |
|---|---|---|---|---|---|
| Automotive Revenue | 27,079 | 26,800 | 24,652 | 28,606 | 30,610 |
| EBIT | 2,039 | 2,124 | 1,778 | 2,519 | 2,135 |
| EBIT Margin | 7% | 7% | 7% | 8% | 6% |
| EBITDA | 3,036 | 2,946 | 2,654 | 3,526 | 3,245 |
| EBITDA Margin | 10.0% | 9.9% | 9.8% | 11.2% | 8.9% |
| Total Liquidity | 11,168 | 9,890 | 11,557 | 15,864 | n/m |
| Net Debt | (399) | (447) | 597 | (1,719) | (1,719) |
| Total Debt | 2,419 | 2,235 | 3,872 | 2,580 | 2,580 |
| Gross Leverage | 0.8x | 0.8x | 1.5x | 0.7x | 0.8x |
| Net Leverage | -0.1x | -0.2x | 0.2x | -0.5x | -0.5x |
CreditSight View Comment
AS OF 28 Feb 2023Our Underperform recommendation on Toyota Motor Co. (TMC) and Toyota Motor Credit Corporation (TMCC) notes is based on relative value as tight trading levels offer little opportunity for outperformance. Toyota is the highest-rated global automaker that benefits from being the largest global automotive manufacturer, balanced geographic diversification, strong liquidity, consistent free cash flow generation, and solid credit metrics. The company has been hampered by supply chain challenges the past fiscal year, causing management to lower its production targets and dampening wholesale volumes and revenue. We expect global wholesale volumes to increase in 2023 as supply chain challenges ease and production schedules improve.
Recommendation Reviewed: February 28, 2023
Recommendation Changed: January 13, 2023
Sample Table
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| Stock | Call | Index Weight | Remarks |
|---|---|---|---|
| ACEN Corporation (ACEN) | Overweight | 0.014 | The ramp up in operating capacity, now at more than 3.1GW, has reflected positively into ACEN’s earnings. Margins were also better off as the company is a net seller in WESM. Subsequent quarters could see a further boost, although to be partially tempered by seasonality. |
| Emperador (EMI) | Underweight | 0.016 | Other consumer companies are preferred as international demand has softened for the whisky segment, with preference shifting to lower-class blended whisky. The company also saw thinner margins across its products. |
| Century Pacific Food (CNPF) | Underweight | 0.011 | Flat tuna prices benefited CNPF, allowing them to sustain a 160-basis-point gross profit margin expansion for the year. However, the stock remains extremely difficult to trade due to its lack of liquidity. |
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