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Fundamental View
AS OF 29 Feb 2024Toyota’s slower ramp of battery electric vehicle (BEV) production and sales relative to its peers was a common investor concern a year ago. However, with the recent slowdown in consumer adoption of BEVs in North America and Europe and Toyota’s dominance in the hybrid electric vehicle (HEV) market, those concerns have abated, at least for the time being. Importantly, Toyota management has indicated its profitability of its HEV portfolio is on par with its ICE portfolio profitability. We continue to believe that Toyota’s market leading position in HEVs provides consumers with a more eco-friendly option than traditional ICE vehicles that can serve as a bridge to EVs while the charging infrastructure is built out and the cost of producing EVs is reduced.
Business Description
AS OF 29 Feb 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. 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 29 Feb 2024Toyota lowered its FY24 wholesale unit forecast based on a downward revision of expected wholesales in Japan, partially offset by a projected increase in wholesales in North America and Europe. The company now expects to wholesale 9.45 mn units in FY24, a 7% YoY increase, down from its previous projection of 9.60 mn units or a 9% YoY increase. The lower wholesale shipments in Japan is largely due to the suspension of shipments of Daihatsu due concerns regarding side-collision safety tests on its small cars.
Management raised its FY24 revenue and operating income forecasts based on an expected increase in current benefits and cost reduction efforts, partially offset by higher operating expenses. The FY24 revenue forecast was boosted by 1% from its previous forecast and now represents projected revenue growth of 17% YoY. Its FY24 consolidated operating income projection was increased 9% above its previous projection, following a more than 50% projection increase last quarter. The consolidated operating profit improvement represents an expectation for a 400 bp YoY operating profit margin expansion.
Key Metrics
AS OF 29 Feb 2024¥ bn | FY20 | FY21 | FY22 | FY23 | LTM F3Q24 |
---|---|---|---|---|---|
Automotive Revenue | 26,800 | 24,652 | 28,606 | 33,777 | 40,007 |
EBIT | 2,124 | 1,778 | 2,519 | 2,486 | 4,482 |
EBIT Margin | 7% | 7% | 8% | 7% | 13% |
EBITDA | 2,946 | 2,654 | 3,526 | 3,671 | 5,699 |
EBITDA Margin | 9.9% | 9.8% | 11.2% | 9.9% | 15.6% |
Total Liquidity | 9,890 | 11,557 | 15,864 | 17,725 | n/m |
Net Debt | (447) | 597 | (1,719) | (2,825) | (2,825) |
Total Debt | 2,235 | 3,872 | 2,580 | 2,724 | 2,724 |
Gross Leverage | 0.8x | 1.5x | 0.7x | 0.7x | 0.5x |
Net Leverage | -0.2x | 0.2x | -0.5x | -0.8x | -0.5x |
CreditSights View
AS OF 18 Mar 2024Our Underperform recommendation on Toyota Motor Co. (TMC) and Toyota Motor Credit Corporation (TMCC) notes is based primarily on relative value. While Toyota’s operating performance and outlook has improved sharply in 2023, we believe Toyota are fairly valued at current levels. However, we expect the Toyota bond complex to underperform the broader market and the A-rated index owing to its high-A credit rating and short duration.
Recommendation Reviewed: March 18, 2024
Recommendation Changed: January 13, 2023