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Fundamental View
AS OF 14 Aug 2024Toyota’s FY25 financial guidance is unchanged and includes flat production volumes, a 1% increase in wholesales, a 1% decline in revenue, and a 20% decline in consolidated operating income. The profit decline is expected to be driven by a more challenging automotive operating environment, increased investments in its employees and suppliers, and an acceleration of investments in growth technologies. While currency could be a bigger tailwind to FY25 profit than its guidance suggests, the broadening vehicle certification scandal could be more costly than originally envisioned as it temporarily suspends production of certain vehicles to confirm compliance with certification standards and bolsters its regulatory testing and oversight compliance procedures.
Business Description
AS OF 14 Aug 2024- 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. Toyota 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 14 Aug 2024Toyota management did not revise its FY25 financial guidance despite F1Q25 financial results falling short of expectations. Toyota unveiled FY25 financial guidance that includes flat wholesales and automotive revenue but a 20% decline in operating income.
Toyota expects FY25 consolidated operating income to decline from ¥5.3 tn in FY24 to ¥4.3 tn, down 20% YoY. The lower operating income is projected to be driven by a more challenging automotive industry environment, increased investments in its employees and suppliers, and an acceleration of investments in growth technologies, each of which is expected to account for roughly one-third of the decline.
The company previously disclosed plans to raise factory worker wages and pay higher prices to its suppliers in FY25, aimed in part to help address quality issues related to overworked employees and overstretched suppliers. The accelerated technology investments span both capex and R&D and address areas such as its multi-pathway strategy (BEV, hydrogen, etc.) and create a foundation for software defined vehicles using a combination of software and artificial intelligence.
Key Metric
AS OF 14 Aug 2024? bn | FY21 | FY22 | FY23 | FY24 | LTM F1Q25 |
---|---|---|---|---|---|
Automotive Revenue | 24,652 | 28,606 | 33,777 | 41,081 | 42,153 |
EBIT | 1,778 | 2,519 | 2,486 | 4,890 | 5,023 |
EBIT Margin | 7% | 8% | 7% | 11% | 10% |
EBITDA | 2,654 | 3,526 | 3,671 | 6,139 | 6,326 |
EBITDA Margin | 9.8% | 11.2% | 9.9% | 13.6% | 12.5% |
Total Liquidity | 11,557 | 15,864 | 10,090 | 12,401 | n/m |
Net Debt | 597 | (1,719) | (2,825) | (4,025) | (4,025) |
Total Debt | 3,872 | 2,580 | 2,724 | 2,868 | 2,868 |
Gross Leverage | 1.5x | 0.7x | 0.7x | 0.5x | 0.5x |
Net Leverage | 0.2x | -0.5x | -0.8x | -0.7x | -0.6x |
CreditSight View Comment
AS OF 16 Oct 2024We reiterate our Underperform recommendations on notes of Toyota Motor Co. (TOYOTA: A1/A+/A+; P/S/S) and Toyota Motor Credit Corporation (TMCC: A1/A+/A+; P/S/S) based primarily on relative value, its FY25 outlook that envisions a 20% decline in operating profit, and its recently broadened vehicle certification scandal that tarnishes its reputation and could weigh on consumer demand for its vehicles. We believe the Toyota bond complex is fairly valued at current levels but will continue to underperform the broader market and the A-rated index owing to its high-A credit rating and short duration.
Recommendation Reviewed: October 16, 2024
Recommendation Changed: January 13, 2023