Itochu Enex is one of the top energy trading houses in Japan. It sells LP gas, gasoline, kerosene, diesel oil, fuel oil, asphalt, and other petroleum products to LP gas distributors, service stations, and corporate users. Its main supplier is ENEOS Holdings (TSE1: 5020, hereinafter ENEOS), but it also sources products from other petroleum and LP gas refineries. Parent company ITOCHU Corporation (TSE1: 8001) owned 52.17% of Itochu Enex (as of September 30, 2021). The company also engages in electricity retail and Nissan car dealership businesses.
In FY03/22, the Home-Life Division (LP gas sales) accounted for 12.5% of operating profit, the Car-Life Division (mainly auto fuel sales to service stations) for 36.2%, the Industrial Business Division (mainly industrial fuel sales) for 22.1%, and the Power and Utility Division (includes power generation, regulation of power supply and demand, sale of electrical power, and regional heat supply) for 29.2% (total excluding adjusted amounts = 100%). Petroleum product sales to service stations and the electric power business are the biggest contributors to profit lines.
Domestic demand for LP gas and petroleum products continues to decline. There are many underlying reasons, including the shrinking population of Japan, the flow of people into cities, economic stagnation, improved fuel consumption and energy conservation, increasing use of air conditioners, and switching to city gas. However, Itochu Enex is mitigating the decline in sales volume and increasing its market share by leveraging its marketing prowess to grow its network of Car-Life Stations and capture new customers and by focusing on niche markets other operators are abandoning.
Starting with the creation of JX Energy in 2010 through the merger of Nippon Oil and Japan Energy, there has been a rapid succession of major restructuring moves among petroleum refineries in recent years. Such restructuring has left just three major refineries, resolving excessive competition in the petroleum industry. This has led to an improved supply and demand balance and better margins on petroleum products. In addition, the company’s expansion of its imported asphalt sales business, enhanced competitiveness of its fleet services business, and entry into the Nissan car dealership business in Osaka all contributed to profit growth in the petroleum-related businesses, and the Car-Life Division’s operating profit grew from JPY2.4bn in FY03/14 to JPY7.7bn in FY03/22.
Itochu Enex entered the electric power business in 2010 and has expanded its in-house power generation capacity through a series of acquisitions of highly cost-competitive generating facilities from materials manufacturers. The company leveraged its sales network (cultivated in the industrial fuel and service stations businesses) covering both corporate and residential customers to expand its electricity sales, and sales volume increased more than 12x between FY03/14 (231,000MWh) and FY03/19 (2,874,000MWh). Sales turned downward in FY03/20 due to fewer large corporate contracts for high-voltage power. This was exacerbated in FY03/21 by the COVID-19 pandemic, with electricity sales volume falling to 1,927,000MWh. Operating profit in the Power and Utility Division grew over the same period, from JPY2.4bn in FY03/14 to JPY6.2bn in FY03/22.
Under its new medium-term business plan, SHIFT! 2022, which covers the period from FY03/22 to FY03/23, the company is targeting annual operating cash flow of JPY30.0bn, a consolidated dividend payout ratio of over 40%, and new investments of JPY60.0bn over the two years, half of which (JPY30.0bn) will be for growth investments (growth investments under the previous medium-term plan were JPY16.8bn over two years). Having mainly engaged in petroleum product sales, Itochu Enex is beginning to “shift” to a new business framework, honing the earnings capacity of its existing businesses while seeking sustainable growth amid the transition toward a carbon-free society. The company will actively pursue new business areas, environmental businesses, next-generation energy, and overseas businesses.
In FY03/22, Itochu Enex reported sales revenue of JPY936.3bn (+26.7% YoY), operating profit of JPY20.9bn (+8.2% YoY), pre-tax profit of JPY22.2bn (+11.0% YoY), and profit attributable to owners of the parent of JPY13.2bn (+8.4% YoY). While revenue saw a reactionary decline after astute petroleum product import/export operations to take advantage of crude oil price fluctuations in FY03/21, operating profit grew 8.2% YoY due to the impact of LP gas import price increases on inventory and valuation gains from making mega-solar plant a subsidiary. Profit attributable to owners of the parent hit a record high for the seventh consecutive year, and also exceeded the current medium-term plan target for FY03/22 of JPY12.5bn.
For FY03/23, the company forecasts sales revenue of JPY1.0tn (+6.8% YoY), operating profit of JPY19.4bn (-7.3% YoY), pre-tax profit of JPY20.8bn (-6.5% YoY), and profit attributable to owners of the parent of JPY13.0bn (-1.5% YoY).
On April 28, 2022, the company announced FY2022 numerical targets for the current medium-term business plan, SHIFT! 2022 (FY03/22 to FY03/23). FY03/23 targets are profit attributable to owners of the parent of JPY13.0bn and an ROE of over 9.0%. Targets for key performance indicators in FY03/22 and FY03/23 include annual operating cash flows of over JPY30.0bn, consolidated dividend payout ratio of 40% or higher (FY03/23 annual dividend forecast is JPY48.0 per share), and total capital investments of JPY60.0bn over the next two years. The new medium-term plan outlines the company’s plans and goals in terms of its business infrastructure, environment and energy-related businesses, and human resources.
On the business infrastructure front, the plan calls for further expansion of the company’s sales network and customer base in Japan, aggressive moves into B2C businesses with the help of additional digital technology, and enhancement of its overseas business, particularly in Asia. At its environment and energy-related businesses, the company aims to move into untapped markets with the help of environmentally friendly products and a wider array of energy sources including electric power. More specifically, plans call for further expanding its electric power business from power generation through sales, centered on renewable energy. The company is also looking to continue adding to its environmental technological expertise and expand its lineup of low-carbon and de-carbonization product offerings. With respect to human resources, the company aims to train more multi-skilled employees that can function effectively in Japan and overseas. It will also work to promote greater diversity and foster a wider range of values.
Shared Research thinks the main strengths of Itochu Enex are its;
|Income statement (IFRS)||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22||FY03/23|
|Gross profit / sales revenue||7.4%||9.1%||12.4%||13.5%||11.9%||8.4%||9.6%||11.8%||8.9%||-|
|Other income (expenses)||-59,724||-72,620||-73,178||-73,926||-71,669||-66,359||-67,161||-67,543||-62,662||-|
|Gains (losses) on fixed assets||-1,460||-1,825||-593||-982||-964||-229||-428||-1,369||-615||-|
|Operating profit margin||1.2%||1.4%||2.3%||2.8%||2.3%||1.8%||2.1%||2.6%||2.2%||1.9%|
|Finance income (expenses)||-456||-581||-708||-834||-803||-2||-1,047||-1,033||-1,097||-|
|Equity in earnings (losses) of affiliates||528||-357||-672||500||493||1,565||1,768||1,726||2,409||-|
|Gains (losses) from sale of shares in affiliates||1,897||-7||-||-||2,326||-||-||-||-||-|
|Pre-tax profit margin||1.4%||1.3%||2.1%||2.8%||2.6%||1.9%||2.2%||2.7%||2.4%||2.1%|
|Income tax expenses||-5,794||-5,626||-6,040||-6,599||-5,945||-5,749||-5,793||-5,675||-6,675||-|
|Profit attributable to non-controlling interests||-925||-1,026||-1,495||-2,340||-2,199||-2,106||-2,129||-2,196||-2,372||-|
|Profit attributable to owners of the parent||7,124||5,503||7,469||10,405||11,025||11,559||12,056||12,168||13,194||13,000|
|Per share (IFRS )||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22||FY03/23|
|Issued shares end-FY('000 shares )||112,991||112,990||112,989||116,881||116,881||116,881||116,881||116,881||116,881|
|Book value per share||833||862||890||960||1,029||1,083||1,137||1,207||1,278|
|Dividend per share||20.0||22.0||24.0||32.0||40.0||42.0||44.0||50.0||48.0|
|Balance sheet (IFRS)||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22||FY03/23|
|Cash and cash equivalents||14,251||16,184||20,824||22,727||22,573||18,725||19,243||34,841||38,145||-|
|Equity method investments||5,927||10,551||8,786||11,749||26,145||29,441||31,583||29,437||28,042||-|
|Tangible fixed assets||66,988||88,836||88,311||87,588||85,326||87,599||132,870||136,291||160,492||-|
|Investments in real estate||14,236||14,369||13,262||11,986||10,166||9,819||13,147||12,797||12,979||-|
|Intangible assets (ex. goodwill)||10,280||23,474||24,329||23,638||20,798||20,091||20,005||19,688||19,232||-|
|Other non-current financial assets||27,830||25,089||22,883||23,521||23,319||22,941||24,431||21,482||25,209||-|
|Short-term bonds and loans payable||11,499||14,208||5,299||9,318||12,432||11,217||7,024||3,041||23,091||-|
|Accrued income tax||4,021||2,489||3,351||5,258||3,650||3,193||4,172||3,874||3,054||-|
|Other current liabilities||18,025||28,182||22,602||27,273||31,402||29,376||28,501||30,973||29,497||-|
|Long-term bonds and borrowings||27,099||26,746||32,366||31,702||30,273||22,893||18,156||14,418||9,838||-|
|Retirement benefit liabilities||7,042||9,350||10,127||9,761||9,820||9,936||10,335||9,925||10,480||-|
|Other noncurrent liabilities||24,127||30,573||32,401||31,912||30,533||31,515||21,345||21,145||22,004||-|
|Equity attributable to owners of parent||94,144||97,432||100,526||108,511||116,104||122,290||128,333||136,233||144,297||-|
|Other components of capital||-2,098||-1,661||-2,364||-1,655||-1,145||-1,406||-1,370||-576||-315||-|
|Total liabilities and equity||321,032||329,059||304,053||344,603||382,621||374,373||387,657||408,327||447,017||-|
|Cash flow statement (IFRS)||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22||FY03/23|
|Cash flows from operating activities||17,530||34,336||30,322||17,831||24,239||25,403||28,106||40,214||39,955||-|
|Cash flows from investing activities||-12,556||-20,410||-16,673||-14,712||-18,458||-13,410||-1,411||-125||-19,113||-|
|Cash flows from financing activities||-8,859||-12,115||-9,059||-1,195||-5,850||-15,857||-26,196||-24,528||-1,023||-|
|Financial ratios (IFRS)||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22||FY03/23|
|Bonds and loans payable||38,599||40,954||37,665||41,020||42,705||34,110||25,180||17,459||32,929||-|
On April 28, 2022, Itochu Enex Co., Ltd. announced its dividend distribution plan for FY03/22.
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The company announced that it would increase its year-end dividend forecast for FY03/22 by JPY2.0 to JPY25 per share from previous plan of JPY23.0 per share announced in January 2022. Combined with the interim dividend of JPY23.0 per share, the company plans to pay JPY48.0 per share in total in ordinary dividends. This is an increase of JPY4.0 from FY03/21, when the company paid JPY50.0 per share in total (JPY44.0 in ordinary dividends + JPY6.0 commemorative dividend). The company had taken following factors into consideration of the increase; steady earnings performance (profit attributable to owners of the parent was a record high for seven consecutive fiscal years), satisfying its dividend policy (consolidated dividend payout ratio of 40% or higher), and its sound financial condition.
On March 18, 2022, Itochu Enex Co., Ltd. announced that its board of directors had approved plans for a simplified absorption-type company split that will move the industrial gas business under its Home-Life division to consolidated subsidiary, Itochu Industrial Gas Co., Ltd.
The company's Home-Life division has been engaged in domestic sales of industrial gases, such as oxygen and nitrogen. Itochu Industrial Gas has focused on industrial gas services, serving domestic industries with tank refills and deliveries and pressure-testing services to provide inspections of pressurized gas containers used for industrial gases. The outlook of the industrial gas market remains uncertain despite there are signs of recovery in the Japanese economy from the global pandemic. The company believes it needs to focus on improving the efficiency of its operations in this business.
The company decided to put all of its industrial gas-related businesses under a single business. Consequently, on March 18, 2022, its board of directors voted to approve a simplified absorption-type company split that will move the industrial gas business under its Home-Life division to Itochu Industrial Gas. The formal agreement detailing the business transfer is scheduled to be finalized on June 30, 2022 and scheduled to be effective on July 1, 2022.
Because this is an absorption-type company split between consolidated subsidiaries, it will not affect the company's consolidated results.
On February 4, 2022, Itochu Enex Co., Ltd. announced changes in representative directors and officers, as well as organizational changes to strengthen its management structure.
New representative director: name and title: (Scheduled appointment date: June 2022, date of Ordinary General Meeting of Shareholders.)
|Name||New title||Current title|
|Tomofumi Yoshida||Representative Director, Executive Vice President of Itochu Enex||Representative Director, Executive Vice President of Itochu Corporation|
Corporate reorganization plans
The petroleum product-related business is expected to face challenging conditions amid the shift toward a carbon-free society. The company is seeking to promote growth in the electric power and environmental fields and create new business opportunities in response to changes in the environment. Accordingly, the company has decided to make changes in certain parts of its corporate structure that will give the flexibility needed to better pursue such opportunities going forward.
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||% of Est.||FY Est.|
|Gross profit / sales revenue||9.4%||9.6%||9.5%||9.6%||13.7%||13.2%||12.5%||11.8%||10.1%||10.5%||9.6%||8.9%|
|Gross profit margin||9.4%||7.7%||7.7%||7.8%||11.2%||10.7%||10.1%||9.4%||-||-||-||-|
|SG&A expenses / sales revenue||7.5%||7.5%||7.4%||7.7%||10.7%||10.0%||9.5%||9.1%||8.0%||8.2%||7.6%||7.3%|
|Operating profit / sales revenue||2.0%||2.2%||2.3%||2.1%||3.0%||3.2%||3.1%||2.6%||2.1%||2.3%||2.7%||2.2%|
|Operating profit margin||1.6%||1.7%||1.8%||1.7%||2.4%||2.6%||2.5%||2.1%||-||-||-||-||-|
|Pre-tax profit / sales revenue||2.2%||2.2%||2.4%||2.2%||3.5%||3.3%||3.1%||2.7%||2.3%||2.5%||2.9%||2.4%|
|Pre-tax profit margin||1.7%||1.8%||1.9%||1.8%||2.9%||2.6%||2.5%||2.2%||-||-||-||-||-|
|Profit / sales revenue||1.2%||1.2%||1.4%||1.3%||2.4%||2.0%||1.8%||1.6%||1.3%||1.4%||1.7%||1.4%|
|Gross profit / sales revenue||9.4%||9.9%||9.2%||10.0%||13.7%||12.7%||11.4%||10.1%||10.1%||10.9%||8.3%||7.3%|
|Gross profit margin||7.5%||7.9%||7.7%||8.2%||11.2%||10.2%||9.2%||7.9%||-||-||-||-|
|SG&A expenses / sales revenue||7.5%||7.6%||7.3%||8.4%||10.7%||9.4%||8.7%||8.1%||8.0%||8.5%||6.6%||6.5%|
|Operating profit / sales revenue||2.0%||2.4%||2.5%||1.8%||3.0%||3.3%||2.9%||1.5%||2.1%||2.5%||3.4%||1.1%|
|Operating profit margin||1.6%||1.9%||2.0%||1.5%||2.4%||2.7%||2.4%||1.2%||-||-||-||-|
|Pre-tax profit / sales revenue||2.2%||2.2%||2.7%||1.8%||3.5%||3.0%||2.8%||1.8%||2.3%||2.7%||3.5%||1.2%|
|Pre-tax profit margin||1.7%||1.8%||2.2%||1.5%||2.9%||2.4%||2.3%||1.4%||-||-||-||-|
|Profit / sales revenue||1.2%||1.1%||1.8%||1.2%||2.4%||1.5%||1.7%||1.2%||1.3%||1.5%||2.2%||0.7%|
In full-year FY03/22, Itochu Enex posted sales revenue of JPY936.3bn (+26.7% YoY). The revenue growth came as the selling price of domestic petroleum products increased on the back of crude oil price rise.
Operating profit was JPY20.9bn (+8.2% YoY) and profit attributable to owners of the parent was JPY13.2bn (+8.4% YoY). There was a reactionary decline from the same period a year ago when the company’s operations benefited from crude oil price changes. However, this downward impact was offset by positive factors such as an inventory impact accompanying the rise in LP gas import prices, and valuation gains from the acquisition of large solar power plants (boosting profit attributable to owners of the parent by JPY2.9bn). The gross margin fell 2.8pp YoY to 8.9%, and SG&A ratio was down 1.8pp YoY to 7.3%. OPM was down 0.4pp YoY to 2.2%, finishing at a slight drop thanks to the net YoY growth in other income at the operating level.
Progress versus forecast: On January 31, 2022, the company upwardly revised its full-year estimate for sales revenue (projections for the profit lines remain unchanged).* Full-year sales revenue was 104.0% of the revised forecast as of Q3 FY03/21 (104.1% in FY03/21), operating profit was 102.1% (120.9%), pre-tax profit was 104.9% (120.0%), and profit attributable to owners of the parent at 105.6% (110.6%).
Revision on FY03/22 full-year company forecast (out January 31, 2022)
Sales revenue: JPY900.0bn (previously, JPY800.0bn)
Projections for the profit lines are unchanged.
Reason for revision: The forecast for sales revenue was upwardly revised mainly to reflect the increase in product selling prices driven by the rise in crude oil price.
|By segment (cumulative)||FY03/20||FY03/21||FY03/22|
|Power & Utility||25,006||52,943||73,436||93,891||20,554||43,342||64,912||98,230||-||-|
|Power & Utility||24,308||51,467||71,367||91,215||18,471||37,361||55,881||84,686||17,903||36,830||65,529||101,148|
|Power & Utility||1,351||2,913||5,221||5,758||1,474||3,424||5,005||5,220||1,580||3,101||7,402||6,180|
|By segment (quarterly)||FY03/20||FY03/21||FY03/22|
|Power & Utility||25,006||27,937||20,493||20,455||20,554||22,788||21,570||33,318||-||-||-||-|
|Power & Utility||24,308||27,159||19,900||19,848||18,471||18,890||18,520||28,805||17,903||18,927||28,699||35,619|
|Power & Utility||1,351||1,562||2,308||537||1,474||1,950||1,581||215||1,580||1,521||4,301||-1,222|
|Business metrics||LP gas direct sales customers ('000)||553||551||552||551||550||549||552||552||553||553||557||557|
|Electricity retail customers ('000)||86||91||95||94||96||100||109||109||112||114||117||118|
|LP gas sales volume ('000 tons)||120||108||141||156||108||93||127||159||108||91||124||151|
|Industrial gas ('000 tons)||19||19||18||20||16||17||16||16||16||17||17||17|
|Profit and loss||Gross profit||5.3||4.6||5.4||6.7||4.6||4.6||5.4||5.8||5.1||4.5||5.6||6.5|
|Affiliate earnings||Itochu Enex Home Life Nishi-Nihon||0.2||0.1||0.1||0.3||0.2||0.1||0.1||0.1||0.1||0.1||0.1||0.4|
In the Home-Life Division, sales revenue stood at JPY94.0bn (+19.0% YoY). The YoY growth was mostly attributable to the rise in selling prices driven by the increase in LP gas import prices. Operating profit came to JPY2.6bn (+69.7% YoY) and profit attributable to owners of the parent was JPY2.8bn (+59.8% YoY). Higher profit lines mainly came from recovery in the industrial gas and overseas businesses accompanying the resumption of economic activity, and from the inventory impact from higher LP gas import prices. The
number of direct sales customers for LP gas increased to 557,000, up 5,000 from end-FY03/21, thanks to ongoing customer acquisition activities and acquisitions of sales rights.
LP gas sales volume: Sales volume of LP gas was down YoY overall. Although demand for commercial and industrial LP gas has been recovering from the impact of the pandemic, wholesale sales and sales volume of auto gas for taxis decreased.
Residential electricity sales business: The number of electricity retail customers came to roughly 118,000, up about 9,000 versus end-FY03/21. The company worked to expand its customer base, mainly by offering package deals covering both its electric power and household LP gas services.
Industrial gas sales volume: Sales volume of all gas types increased YoY as operating rates of supplied factories, restaurants, etc., recovered after demand turned down due to the pandemic.
|Business metrics||Gasoline sales volume ('000 kl)||711||266||472||425||377||453||446||392||407||441||443||395|
|Kerosene ('000 kl)||54||36||129||151||57||24||130||162||41||22||118||172|
|Diesel oil ('000 kl)||776||257||522||495||470||493||539||508||477||529||533||531|
|New cars ('000 units)||6||8||5||8||5||6||7||8||5||7||7||6|
|Pre-owned cars ('000 units)||6||7||5||6||5||5||6||6||6||5||5||4|
|Profit and loss||Gross profit||11.3||-||-||11.7||10.4||12.0||12.0||12.4||11.0||11.1||12.0||12.3|
|Affiliate earnings||Enex Fleet||0.3||0.5||0.3||0.4||0.6||0.7||0.5||0.2||0.3||0.3||0.6||0.4|
|Osaka Car Life Group||0.2||0.3||0.0||0.1||-0.1||0.3||0.2||0.4||0.2||0.2||0.3||0.2|
Sales revenue in the Car-Life Division reached JPY516.7bn (+24.6% YoY) as the selling prices of domestic petroleum products rose in tandem with the higher crude oil price. The increase in sales volume was another contributing factor. Operating profit came to JPY7.7bn (+0.7% YoY) and profit attributable to owners of the parent
was JPY4.0bn (-2.0% YoY). Profitability in the car dealership business improved while retail margin narrowd at CS business.
The division’s Car-Life Station count at end-FY03/22 was 1,636, down 51 versus end-FY03/21.
Petroleum product sales volume: The COVID-19 pandemic, inclement weather during the summer, and a warm winter had a negative impact. However, sales volume grew slightly YoY, thanks to some signs of recovery in the sales volume of diesel and gasoline following a drastic drop during the same period a year ago.
Automobile related business: At Osaka Car Life Group, the subsidiary operating the car dealership business, overall sales volume declined YoY on greater impact from the pandemic and drop in production volume due to the semiconductor shortage.
|Business metrics||Gasoline sales volume ('000 kl)||241||241||204||186||176||179||182||165||214||207||196||191|
|Kerosene ('000 kl)||142||98||170||203||75||47||167||236||71||54||165||222|
|Diesel oil ('000 kl)||280||278||350||322||266||250||286||344||283||312||327||283|
|Heavy fuel oil ('000 kl)||484||489||537||537||539||524||620||558||415||397||554||498|
|Asphalt ('000 tons)||70||94||109||97||72||67||88||82||58||68||84||84|
|Profit and loss||Gross profit||1.4||1.8||0.8||4.1||2.7||2.1||2.1||2.5||2.0||2.6||2.3||1.5|
Sales revenue in the Industrial Business Division reached JPY224.5bn (+39.6% YoY), mainly due to higher selling prices of petroleum products for industrial use driven by the rise in crude oil prices. Operating profit was JPY4.7bn (-6.7% YoY) and profit attributable to owners of the parent was JPY3.3bn (-15.7% YoY). The asphalt business generated higher profit, but there was a reactionary fall-off
from cumulative Q3 FY03/21 when operations benefited from crude oil price fluctuations.
Asphalt sales business: While sales volume
declined, the company conducted sales activities emphasizing profitability.
Marine fuel sales business: Sales of fuels for coastal vessels increased on greater supply to
customers acquiring new routes. However, sales for ocean-going vessels declined, and
overall sales volume was down YoY.
Auto fuel card sales to corporations: Sales volume was up YoY due to sustained efforts to attract new customers. In the AdBlue®* sales business, which is an initiative to reduce environmental impact, the company worked hard to stabilize supply to existing customers amid a domestic urea shortage by maximizing use of its own supply bases in Japan, including the Saitama AdBlue® facility opened in FY03/21. Sales volume of GTL fuel** recorded a strong increase as a result of expanding supply areas and being selected for use on domestic construction sites.
* AdBlue® is a high-grade urea solution used to detoxify diesel vehicle exhaust emissions. (AdBlue® is a registered trademark of the German Association of the Automotive Industry (VDA))
** GTL (Gas To Liquid) is a clean diesel oil alternative derived from natural gas.
|Power & Utility||FY03/20||FY03/21||FY03/22|
|Business metrics||Electricity (GWh)||577||667||566||577||509||587||540||555||542||653||605||672|
|- High voltage (GWh)||486||565||460||437||384||453||399||324||389||497||442||453|
|- Low voltage (GWh)||92||100||107||140||125||134||142||230||154||155||163||219|
|Steam ('000 tons)||150||146||104||106||125||125||130||156||130||119||108||118|
|Heat quantity ('000 J)||256||514||230||258||237||518||219||275||237||466||225||301|
|Profit and loss||Gross profit||2.6||2.9||2.6||1.5||2.6||3.3||2.6||1.8||2.7||2.7||1.5||0.2|
|Affiliate earnings||Enex Electric Power Group||0.0||0.1||0.5||0.4||0.5||0.1||0.2||0.4||0.3||0.1||0.2||-0.1|
|Enex Life Service||0.1||0.0||0.1||0.1||0.1||0.1||0.0||0.2||0.1||0.0||0.1||0.1|
|Tokyo Toshi Service||0.2||0.5||0.2||-0.1||0.3||0.6||0.1||-0.4||0.3||0.5||0.1||-0.2|
|Oji-Itochu Enex Power Retailing||0.2||0.1||0.3||0.2||0.2||0.2||0.5||-0.2||0.2||0.2||0.0||0.1|
Operating revenue in the Power and Utility Division stood at JPY101.1bn (+19.4% YoY). The YoY growth was mainly due to an increase in the volume of electricity wholesale sales through the market and price increases. Operating profit came to JPY6.2bn (+18.4% YoY) and profit attributable to owners of the parent was JPY3.5bn (+30.5% YoY). Despite narrowing profit margin in the retail electricity sales business due to soaring resource prices that raised sourcing costs, valuation gains from the acquisition of large solar power plants contributed to results (boosting profit attributable to owners of the parent by JPY2.9bn).
Electric power business: High-voltage electricity sales volume saw YoY growth with the acquisition of large contracts. Overall retail electricity sales volume also grew YoY on growth in low-voltage electricity sales volume due
to an increase in the number of contracts mainly with households.
Heat supply business: Demand in the heat supply business was down slightly YoY. In 1H, demand declined YoY, but up YoY in 2H, because average temperatures during the winter were substantially lower than a year earlier.
|(JPYmn)||1H Act.||2H Act.||FY Act.||1H Est.||2H Est.||FY Est.||1H Est.||2H Est.||FY Est.|
|Sales revenue (IFRS)||398,130||538,176||936,306||1,000,000||6.8%|
|Gross profit / sales revenue||10.5%||7.8%||8.9%|
|SG&A expenses / sales revenue||8.2%||6.5%||7.3%|
|Operating profit / sales revenue||2.3%||2.2%||2.2%||1.9%|
|Recurring profit margin||2.5%||2.3%||2.4%||2.1%|
|Profit attributable to owners of the parent||5,527||7,667||13,194||13,000||-1.5%|
|Net income margin||1.4%||1.4%||1.4%||1.3%|
The full-year FY03/23 company forecast calls for sales revenue of JPY1.0tn (+6.8% YoY), operating profit of JPY19.4bn (-7.3% YoY), pre-tax profit of JPY20.8bn (-6.5% YoY), and profit attributable to owners of the parent of JPY13.0bn (-1.5% YoY).
Medium-term business plan: FY03/23 marks the second year of "SHIFT! 2022" (FY03/22–FY03/23). The company did not disclose its projections for sales revenue generated through individual segments when it announced its FY03/23 forecast on April 28, 2022.
Dividends per share: JPY48.0 (versus JPY48.0 in FY03/22)
The company forecasts segment profit attributable to owners of the parent of JPY2.5bn (+44.8% YoY).
The company forecasts segment profit attributable to owners of the parent of JPY3.8bn (-6.3% YoY).
The company forecasts segment profit attributable to owners of the parent of JPY2.6bn (-32.6% YoY).
Target structural reforms of existing businesses and strengthen earnings capacity. In particular:
The company is targeting four main growth areas: next-generation energy, environmental businesses, infrastructure, and regional revitalization. It will accumulate knowledge and access next-generation technologies through tie-ups with partners in industry, academia, and government. Through co-creation with companies in different industries, the company will strive to create businesses that help bring about a carbon-free society, such as by visualizing CO2 emissions.
The company forecasts segment profit attributable to owners of the parent of JPY3.9bn (+46.1% YoY).
In April, 2021, Itochu Enex outlined its new medium-term business plan, SHIFT! 2022, covering FY03/22 and FY03/23. Under SHIFT! 2022, the company is targeting annual operating cash flow of over JPY30.0bn, a consolidated dividend payout ratio of over 40%, and new investments of JPY60.0bn over the two years, half of which (JPY30.0bn) will be for growth investments (growth investments under the previous medium-term plan were JPY16.8bn over two years). Having mainly engaged in petroleum product sales, Itochu Enex is beginning to “shift” to a new business framework, honing the earnings capacity of its existing businesses while seeking sustainable growth amid the transition toward a carbon-free society. The company will actively pursue new business areas, environmental businesses, next-generation energy, and overseas businesses.
Two-year period of FY03/22 and FY03/23
The new medium-term business plan will outline the company’s plans and goals in terms of business infrastructure, its environment and energy-related businesses, and human resources.
The company believes that its core oil and gas businesses are the backbone of its success, and will work to boost efficiency and competitiveness in these crucial areas. At the same time, assuming that a great deal of energy will be supplied by electric power going forward, the company will also work to expand its business base through the use of digital technology. In addition to drawing up a strategy that will enable long-term growth, the company will focus on environmental businesses, overseas businesses, next-generation energy, and other new business areas.
The JPY60.0bn in planned investments (over two years) includes:
Itochu Enex will build outward into peripheral businesses related to “car life” and “home life” and aggressively invest in new business areas. The company will fully tap into the customer bases and sales networks it has built up in the LP gas, oil, and car dealership businesses, and leverage digital technology centered on electric power and environmental products to offer services to a wide range of industries and corporations.
Building off its existing networks, the company will make inroads into peripheral business areas, such as compiling a menu of electric power derived from renewable energy, rapid charging services, multiservice stations that offer hydrogen and other fueling options, new business using fuel cell and electric vehicles, and development of environmental products.
In April 2021, the company established a Carbon Neutral Strategy Division and a Sustainability Office. The former will seek to identify a wide range of business opportunities that both contribute to realizing carbon-neutrality and offer growth potential. The division will work closely with the company’s sales teams to promote activities. The Sustainability Office will oversee the promotion of sustainability across the group, including measures to address climate change.
In May 2021, Itochu Enex established a Sustainability Committee to serve as an advisory body to the Management Advisory Conference. The committee will deliberate on sustainability issues and response measures, and formulate, drive, and monitor medium- and long-term sustainability management strategies.
1.Title: Moving 2020
2.Period: Two-year period covering FY03/20 and FY03/21
Promote growth strategies
Maintain and enhance revenue base: Pursue group synergies, make increased use of customer base
Focus on customer base and regions. In addition to trial runs and rollouts of new products and services in regions where it has a strong foothold such as in Kansai and western Japan, the company will leverage its networks and customer base to strengthen its cross-selling strategy of products and services.
Develop overseas and peripheral markets: Make aggressive investments overseas, use M&A to enter peripheral business areas
Aggressively develop overseas businesses through forging partnerships and alliances. Focus areas include gas (industrial, LP), the automotive aftermarket, and renewable energy.
Create new businesses: Move into environment-related businesses
Established environmental business department in April 2019. Promote sales expansion of AdBlue and spur renewable energy business through the use of Enex Infrastructure Investment Corporation.
Enhance organizational foundation
Strengthen group management: Improve management oversight at consolidated group level, create more effective governance structure
Use personnel strategy to support growth: Promote diversity, train globally oriented employees
Promote innovation: Pursue efficiency gains at existing businesses, increase use of digital technology
4.Quantitative targets for FY03/21 (revised May 15, 2020)
Profit attributable to owners of the parent: JPY11.0bn
Return on Equity: —
Dividend payout ratio on consolidated earnings: 40% or higher
Total capital spending during two-year period: JPY43.0bn (JPY20.0bn in FY03/21)
The following table shows the company’s operating profit by business area since FY03/05. Itochu Enex has three key business areas: petroleum-related businesses (Car-Life Division and Industrial Business Division), LP gas-related businesses (Home-Life Division), and electricity-related businesses (Power and Utility Division).
The period from FY03/13 to FY03/17 was a profit growth phase, with operating profit expanding from JPY9.0bn to JPY19.7bn.
One reason for the profit growth was expanded profit in petroleum-related businesses. There was a rapid succession of major restructuring moves among petroleum refineries. Nippon Oil and Japan Energy merged in 2010 to become JX Energy, JX Energy and TonenGeneral Sekiyu in 2017 to become ENEOS, and Idemitsu Kosan and Showa Shell Sekiyu in 2019 to become the new Idemitsu Kosan. This had the effect of resolving excessive competition in the petroleum industry, leading to an improved supply and demand balance and better margins on petroleum products. In addition, Itochu Enex’s expansion of its imported asphalt sales business, the enhanced competitiveness of its fleet services business, and entry into the Nissan car dealership business in Osaka all contributed to profit growth in the petroleum-related businesses.
Another reason for the profit growth was expanded profit in the electricity-related businesses. Itochu Enex entered and expanded the electric power business, acquiring power plants at the Hofu factory of the old Kanebo in 2004 and at the Nihongi factory of Nippon Soda (TSE1: 4041) and the Amagasaki factory of Daicel (TSE1: 4202) in 2006. Electricity sales volume increased tenfold between FY03/14 (231,000 MWh) and FY03/17 (2,431,000 MWh). Operating profit in the Power and Utility Division grew from JPY2.4bn in FY03/14 to JPY6.6bn in FY03/17.
From FY03/17 onward, operating profit has remained between JPY17.0bn and JPY20.0bn.
Profit in the petroleum-related businesses continued to grow, with contributions from an improved supply and demand balance following restructuring in the refinery industry, expansion of the imported asphalt sales business, the enhanced competitiveness of the fleet services business, improved sales of marine fuel, and entry into the Nissan car dealership business in Osaka.
However, profit in the electricity-related businesses seems to have peaked. Sales volume grew only slightly from 2,431,000 MWh in FY03/17 to 2,587,000 MWh in FY03/20. Profitability deteriorated and profit growth stalled on fiercer competition caused in part by the resumption of nuclear power plants operation, advances in energy conservation, and stagnation in industries that ordinarily consume substantial electricity volume. Sales volume further decreased to 1,927,000 MWh in FY03/21. Low-voltage sales were up as more people stayed home consuming electricity during the pandemic, and as the number of low-voltage contracts increased, primarily for residential customers. However, a downturn in large corporate contracts for high-voltage power caused overall sales volume to decline.
It is Shared Research’s understanding that the company’s basic strategy is to leverage its strong procurement capacity—based on being one of the top domestic energy handlers in terms of volume—to realize a flexible management structure that allows it to agilely sell the products that will contribute most to earnings in response to changes in the business environment.
Since Itochu Enex was established in 1961, ENEOS (Nippon Mining and Kyodo Petroleum at the time) has been the company’s major supplier, and each has been the other’s largest trading partner. Later, Itochu Enex also expanded its business relationship with Idemitsu Kosan, Cosmo Oil, and others. Establishing close ties with these major petroleum refineries has been the basis of the company’s management approach, since the source of its competitiveness is its bargaining power to procure a high-volume, inexpensive, and stable supply of petroleum products from the refineries.
The period of rapid economic growth shortly after the founding of Itochu Enex was also a period of rapid expansion in the petroleum product and LP gas markets. The company promoted a quantitative expansion strategy leveraging its balance sheet to the full extent possible, including by shouldering the investment for building service stations for distributors, supporting promotional spending, and shoring up distributors whose performance deteriorated.
The bursting of the Japanese asset price bubble in the early 1990s compelled Itochu Enex to make a course correction in its expansion strategy. Nevertheless, it expanded its petroleum spot trading business to take advantage of the intense competition caused by excessive refining facility capacity and a plethora of petroleum refineries. In addition, it worked to maintain or even expand its trading network by establishing its own service station brands (Chu Boy and carenex) and inviting refinery-affiliated service stations—which were having disadvantageous terms pressed upon them by the refineries—to its distributor network.
In the 2000s, petroleum refineries began drastic industry restructuring in the face of deteriorating profit structures caused by the issue of excessive refining facilities. The biggest change was the establishment of JX Energy (now ENEOS) through the merger of Nippon Oil and Japan Energy in 2010. Thereafter, the scrapping of excessive facilities accelerated, and in 2019 Idemitsu Kosan and Showa Shell Sekiyu merged, essentially leaving just the big three refineries: ENEOS, Idemitsu Kosan, and Cosmo Oil.
As a result, the trading business peaked at Itochu Enex, but the profitability of the business of selling fuel to affiliated service stations improved on a better supply and demand balance for petroleum products. The company used the resultant cash flows to invest in a large-scale thermal power plant and enter the electric power business, targeting large customers in the high-voltage market. Then in 2016, it gained a tailwind for expanding the business when the small-customer, low-voltage (retail) market was deregulated.
From 2017 onward, even as new large-scale thermal power plants were constructed and nuclear power plants in western Japan resumed operations, energy conservation efforts made advances and electricity demand for manufacturing declined on industry stagnation. As a result, there was a more relaxed electricity supply and demand balance and a sense that the electric power business had peaked. In response, Itochu Enex entered the auto sales business, invested in an energy infrastructure fund, and began targeting overseas expansion to prepare for the establishment of a new growth strategy model.
The company’s mainstay products are energy-related. It sells fuels such as LP gas and petroleum products (including gasoline, diesel oil, kerosene, fuel oil, and asphalt) and electricity to retailers and final consumers.
For LP gas, Itochu Enex has a wholesale channel targeting distributors and a direct sales (retail) channel targeting ordinary households and restaurants, as well as hospitals and factories (Home-Life Division).
In terms of petroleum products, in the Car-Life Division, it wholesales gasoline, diesel oil, and kerosene to affiliated service stations (Car-Life Stations), including fleet service stations serving member shipping companies through its fleet service station business. In the Industrial Business Division, it sells diesel oil to shipping and bus companies and fuel oil to factories and shipping lines.
In the Power and Utility Division, the company sells electricity sourced from its own power plants, in arm’s length transactions from the former general electricity utility companies (power companies) and independent power generation companies, or from the Japan Electric Power Exchange (JEPX). Sales categories include low-voltage electricity for ordinary households and stores and high-voltage and extra high-voltage electricity for government offices, office buildings, hospitals, and factories. The company’s procurement policy calls for sourcing mainly from its own plants and also from the Japan Electric Power Exchange (JEPX) when its own power generation is inadequate.
The following chart shows the company’s supply chain for petroleum products and LP gas. The bulk of its customer base is in B2B and B2B2C businesses, handled through its wholesale operations.
Itochu Enex has four segments: the Home-Life Division, which handles LP gas, the Car-Life Division, which focuses on fuel sales to Car-Life Stations (service stations), the Industrial Business Division, which handles industrial fuel, and the Power and Utility Division, which handles electricity.
|Gross profit margin||23.7%||24.6%||25.9%|
|Operating profit margin||3.8%||3.1%||2.0%|
|Finance income (expenses)||-24||-23||-14|
|Equity in earnings (losses) of affiliates||1,251||825||1,410|
|Pre-tax profit margin||5.1%||4.0%||3.7%|
|Profit attributable to owners of the parent||3,068||2,113||1,726|
|Depreciation and amortization||-2,698||-3,759||-3,887|
|Investments accounted for using equity method||18,774||19,049||20,282|
|Increase in right of use assets||-||918||1,350|
The Home-Life Division engages in wholesale and retail LP gas operations. Itochu Enex has a 20% stake in Japan Gas Energy Corporation, an importer and primary dealer formed in 2009 with the merger of Japan Energy, Nissho Iwai LP Gas, and the LP gas business of Itochu Enex. ITOCHU Corporation is also involved in LP gas procurement. The Home-Life Division engages in the entire LP gas supply chain, from procurement and distribution to wholesale and retail.
Itochu Enex buys LP gas from Japan Gas Energy, an importer and primary dealer; sells it to retailers or subsidiaries; and the retailers or subsidiaries in turn sell it to individual households, or to restaurants, factories, hospitals, hotels, and other places of business.
There are four major LP gas importers and primary dealers (including Japan Gas Energy), 1,100 wholesalers (including Itochu Enex), and 21,000 retailers (including Itochu Enex).
LP gas importers and primary dealers are usually petroleum refineries or the subsidiaries of general trading houses. Because of the large number that previously existed, excessive competition weighed on margins and caused fragile profit structures. In the 2000s, alliances and mergers resulted in the creation of four major importers and primary dealers (ENEOS Globe, Japan Gas Energy, Gyxis, and Astomos Energy).
Four major importers and primary dealers: ENEOS Globe is a joint venture by Nippon Oil & Gas and Mitsui Marubeni Liquefied Gas. Japan Gas Energy is a joint venture by Nissho LP Gas and the LP gas divisions of Japan Energy and Itochu Enex. Gyxis is a joint venture by the LP gas divisions of Cosmo Oil, Sumitomo Corporation, Showa Shell Sekiyu, and TonenGeneral Sekiyu. Astomos Energy is a joint venture by the LP gas divisions of Idemitsu Kosan and Mitsubishi Corporation.
There are major wholesalers like Iwatani Corporation (also a gas importer and primary dealer), Mitsuuroko, Shinanen, and San-ai Oil, but also influential operators in each region that are actively promoting commercial rights acquisition and sales visits, accelerating growth of the high-margin retail business.
There are some 21,000 retail distributors nationwide, many of them operating on a small scale. In recent years, wholesalers’ retail divisions have been expanding their market shares, rapidly increasing their customer counts through commercial rights acquisition.
In general, in the LP gas supply chain, the order by margin level is retail ＞ wholesale ＞ importer and primary dealer. In April 2020, gross margins were JPY13.5 per cubic meter (cbm) for importers and primary dealers, JPY129.8 per cbm for wholesalers, and JPY550.8 per cbm for retailers. The reason the margin is low for importers and primary dealers is that their facilities are usually concentrated, their handling volumes are massive, and they are competing in a sphere where it is hard to stand out from peers. On the other hand, the margin is high for retailers because many are small, with low sales volume and poor equipment efficiency, and competition is relatively relaxed. Wholesalers with delivery systems in place for small numbers of gas cylinders—especially in light of the difficulty retail operators are having in finding successors—have been working to acquire commercial rights* to secure high retail margins.
*Commercial rights acquisition is a business practice particular to the LP gas industry. In recent year, although door-to-door sales activities to increase the number of retail contracts have become more common, the industry did not traditionally make direct approaches to consumers. Typically, when a new residence is built, a retailer approaches the construction company or contractor, who then refers the client (person who ordered the construction) to the retailer, and a new LP gas contract is concluded. In the case of pre-owned homes or rentals, the new resident usually just automatically chooses the LP gas retailer that already serviced the residence. For this reason, “commercial rights” exist in a practical sense despite having no legal basis, and they are bought and sold between LP gas companies.
LP gas retailers are increasingly selling their commercial rights and closing their businesses due to declines in customer count caused by a shrinking population and the flow of people into cities; reduced consumption caused by climatic warming and an aging population; the rising costs of delivery, safety management, and information systems; and the large sums offered by wholesalers for commercial rights acquisition.
|Gross profit margin||12.0%||47.7%||24.4%|
|Operating profit margin||4.0%||8.1%||3.9%|
|Depreciation and amortization||3.2%||4.8%|