Morgan Stanley has lowered its recommendation on Tokyo Steel Manufacturing (ticker 5423) to "underweight" following the company's third-quarter results, which came in below both market consensus and the bank's own forecasts. The brokerage also cut its price target to 1,300 yen from 1,500 yen, reflecting a more cautious outlook after the earnings update.
Analysts at Morgan Stanley said Tokyo Steel's fiscal third-quarter operating profit missed expectations due to softer sales volumes and ongoing pressure on metal spreads. The steelmaker reduced its full-year operating profit forecast to 8.2 billion yen from 9.5 billion yen - below market expectations of about 10 billion yen - and signalled that operating profit in the fourth quarter is likely to be close to zero.
The downgrade and target cut follow a string of structural headwinds identified by Morgan Stanley. Those include persistent labour shortages in Japan's construction sector, ongoing project delays and rising construction costs, which the bank said are restraining demand recovery and limiting Tokyo Steel's ability to pass higher costs through to customers.
In addition, Morgan Stanley highlighted commodity-side pressures. High scrap metal prices, together with increased competition from blast furnace operators moving into the electric arc furnace market, are expected to keep metal spreads under strain, further compressing margins.
As a result of these factors, Morgan Stanley significantly lowered its profit forecasts for the coming years. The bank cut its operating profit estimate for fiscal 2027 to 11 billion yen from 22.5 billion yen and for fiscal 2028 to 14 billion yen from 25 billion yen.
While the analysts acknowledged some early signs of demand stabilisation in smaller regional projects, they emphasised that supply-demand conditions overall remain soft, and therefore a near-term earnings recovery appears unlikely.
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