Japanese Brokers Report Another Weak Quarter on Sluggish Market; Nomura Looks Undervalued

We maintain our fair value estimate of JPY 615 for Nomura Holdings, equivalent to 0.58 times book value; and our fair value estimate of JPY 650 for Daiwa Securities, equivalent to 0.67 times book value, after Japan’s securities brokers’ results for the second quarter of their fiscal year ending March 2023. Though 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 progress toward reducing its future risk, such as by emphasizing recurring sources of revenue in its retail segment rather than flow-based sources. Recurring sources comprised 47% of Nomura’s retail revenues in the July-September period, up from 45% in the previous quarter and 39% a year earlier. Daiwa Securities, meanwhile, said that asset-based revenue comprised 52% of its retail revenue, up from 50% in the previous quarter and 40% a year earlier, slightly ahead of Nomura. At current P/B multiples of 0.45 times for Nomura and 0.60 times for Daiwa, Nomura looks more undervalued relative to its intrinsic value. Our fair value estimate for Nomura's ADR moves from $5.00 to $4.40 due to the Japanese yen's depreciation.