Analyst Note| Michael Makdad |
We maintain our fair value estimate of JPY 615 for Nomura Holdings, equivalent to 0.60 times book value; and our fair value estimate of JPY 650 for Daiwa Securities, equivalent to 0.69 times book value, after Japan’s securities brokers’ results for the April-June quarter. Although we think Daiwa Securities deserves a higher price/book multiple than Nomura—reflecting lower historical earnings volatility and smaller risk than Nomura—we think Nomura is making some progress toward reducing its future risk, such as by emphasizing recurring sources of revenue in its retail segment rather than flow-based sources. Such recurring sources of revenue covered 49% of retail-segment costs in the past quarter, compared with 47% a year earlier. We change our Morningstar Uncertainty Rating for Nomura to Medium from High, in line with Daiwa’s Medium rating, though we still think Nomura's risk is slightly higher. At current P/B multiples of 0.48 times for Nomura and 0.63 times for Daiwa, Nomura looks more undervalued relative to its intrinsic value.