Nippon Steel: F3/26 Results Relatively Solid, but Watching Middle East Impact
Core Conclusion
Nippon Steel’s F3/26 business profit (BP) of ¥514.1bn exceeded both its guidance of ¥420bn and our estimate of ¥425bn, driven by US tariff-protected steel margins and US Steel’s contribution. The F3/27 underlying BP guidance of ¥700bn (¥600bn ex-US Steel) is 7.7% above our ¥650bn forecast, implying consensus is likely too low. The key risk is a potential Middle East disruption that management estimates could cost ~¥50bn per quarter. At 0.53x P/B (F3/26), downside appears limited. We maintain Overweight with a ¥700 target.
What the Market May Be Underestimating
Three factors are likely underappreciated: (1) US steel prices have remained elevated despite management’s expectation of a 2H decline—if high prices persist, full-year BP could exceed the ¥700bn guidance. (2) US Steel’s profit contribution is guided at ¥100bn, 54% above our ¥65bn estimate, and the company’s assumption of lower US prices is conservative; stable-to-rising prices would further boost earnings. (3) The current P/B of 0.53x provides a meaningful valuation floor—even with a modest 0.65x multiple on end-F3/27e BPS of ¥1,047, the stock offers 25% upside.
Evidence Chain
F3/26 Beat Confirms Margin Resilience
F3/26 BP came in at ¥514.1bn vs. company guidance of ¥420bn and our ¥425bn. Excluding inventory revaluations and one-offs, underlying profit was ¥650.4bn, also above the ¥620bn guidance. This beat was supported by stronger-than-expected steel margins in Japan and the US, where tariffs have insulated domestic prices from global weakness.
F3/27 Guidance Points to Further Upside
Management guided F3/27 underlying BP at ¥700bn (¥600bn excluding US Steel). Our estimate is ¥650bn, and we believe consensus is in line with ours. The ¥50bn gap implies our model likely underestimates either US Steel’s contribution or the pace of Japanese steel recovery. The ¥100bn US Steel contribution assumption is a key input—if actual prices stay above the assumed decline, upside risk increases materially.
Valuation Safety Net at 0.53x P/B
Using F3/26 actual BPS, the stock trades at 0.53x P/B, near trough levels. Our ¥700 target price implies 0.65x forward BPS (F3/27e ¥1,047). Even under a worst-case Middle East scenario costing ¥50bn/quarter, F3/27 BP would drop to ~¥550bn, still implying a P/B of ~0.5x—providing limited downside.
FCF Deficit but Stable Dividend
Free cash flow is projected at a ¥400-500bn deficit in F3/27, driven by capex and working capital. However, the annual DPS guidance of ¥24 is unchanged, signaling management’s confidence in cash generation over the cycle.
Key Divergences and Risks
- Middle East escalation: Every quarter of disruption could reduce BP by ¥50bn, not incorporated in guidance. The impact would be felt mainly through higher energy costs and shipping disruptions.
- Weaker-than-expected steel demand: Both globally and in Japan, a slowdown could pressure volumes and margins.
- Raw material cost inflation: Higher coking coal or iron ore prices would compress steel spreads.
- Carbon neutrality capex: Long-term costs remain uncertain; slow progress could increase regulatory burdens.
Valuation and Trading Implication
Our ¥700 target is derived from 0.65x end-F3/27e BPS of ¥1,047, based on a 6.5% ROE (ex-inventory) and ~10% cost of equity. The 0.53x current P/B offers a strong valuation floor. While Middle East risk is real, we believe the downside is limited given the low base. The key catalyst is US steel price persistence—if the 2H decline fails to materialize, F3/27 earnings will exceed guidance, likely triggering multiple expansion. We remain Overweight.