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Can Idemitsu Kosan Generate Enough Cash From Oil to Fund Transition?

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  • Slowing oil consumption could result in declining revenue
  • Ramp-up of CAPEX necessary to ensure longevity
  • Attractive dividend yield could rise to 2x Japanese average

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Idemitsu Kosan’s revenue breakdown 2020

Price and volume remain bullish

  • Throughout the past year, the 50DMA has stayed above the200 DMA, which is a strong bullish signal
    • The share price is up 33% YTD
  • Volume RSI stayed above the 50%-line, which is positive as well

Slowing oil consumption could result in declining revenue

  • With 80% of sales, Idemitsu is still heavily reliant on its petroleum segment
  • Over the 10 past years, crude oil consumption in Japan declined by 3% annually
    • This trend might even accelerate, and the company should focus on generating cash from oil to fund other segments
    • I expect shrinking revenue after 22E

Ramp-up of CAPEX necessary to ensure longevity

  • In the past, Idemitsu has been rather conservative in its expansion strategy
    • Capex/Depreciation even remained below 1x
  • In its new alignment, the management must focus on expanding in other segments to compensate for a falling contribution from petroleum
    • CAPEX budget for the next 3 years is JPY550bn+, which is much higher than the past

Transition takes long time, but should pay off in future

  • By 2030, the company plans to increase its renewable capacity to 4 Gigawatt from currently 0.2 Gigawatt
    • In addition, it shifts from coal production to gas
  • Also, it allocated JPY100bn M&A budget to expand its chemicals and materials segment
    • I think that the market is too pessimistic about the long-term outlook

Attractive dividend yield could rise to 2x Japanese average

  • Management aims to achieve a ROIC of 7% over time
    • This target might be a bit too optimistic in the short run, but it should at least cover WACC
  • In the past share, the company has increased its dividend per share and is likely to maintain that level
  • This could result in a massive dividend yield of 5%+ (Japanese average is 2.5%)

FVMR Scorecard – Idemitsu Kosan

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Analysts see small upside, but remain cautious

  • Currently, there is no catalyst in place, that would lead to excessive optimism
    • Most analysts are still on HOLD
  • Consensus expects a record revenue in 21E
    • However, as oil price tends to normalize, the company is likely to face shrinking revenue in 22E and 23E

Get financial statements and assumptions in the full report

P&L – Idemitsu Kosan

  • Strong bottom-line mainly driven by inflated oil prices worldwide
    • The Japanese gov’t announced to release some of its oil reserve to prevent a further spike in price

Balance sheet – Idemitsu Kosan

  • As of 2021, Idemitsu has a cash-to-assets ratio of 3%
    • Low cash generation ability might result in conservative expansion plans
  • Idemitsu has moderate high leverage
    • Its net-debt to equity ratio stood at 0.9x in 2021

Ratios – Idemitsu Kosan

  • Unlike other petroleum companies, Idemitsu has a very high efficiency
  • Gross margin in 21E and 22E continues to stay on a high level, attributable to high oil price rather than efficiency gains

Long-term share price performance potential

Free cash flow – Idemitsu Kosan

  • FCFF likely to remain volatile given abrupt changes in working capital

Value estimate – Idemitsu Kosan

  • I expect a higher revenue drop in 23E and 24E than the consensus
    • However, my long-term outlook is a bit more optimistic
    • Idemitsu should be able to focus on its other segments to diversify away from oil
  • Historically, Japan has a very low risk-free rate

World Class Benchmarking Scorecard – Idemitsu Kosan

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is high dependency on oil

  • Adverse regulatory changes could accelerate phase-out of fossil fuels
  • Failure to identify suitable expansion opportunities for non-oil business segments
  • Lower than expected operating cash flows could hamper expansion plans as the company has not much cash reserves


  • Petroleum segment strong in short run but does not ensure longevity
  • Management’s plans to expand other segments should drive revenue growth in the long run
  • A 5% dividend yield at cheap valuation might be already attractive enough

Download the full report as a PDF

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