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Toshiba operational profit downgrade: Japanese company now more dependent on turnaround plan succeeding
The announcement of a five-year turnaround plan towards the end of 2018 was met cheerily by stock markets; even though several profit-making businesses had been sold, expectations were the company would begin to recover after being flushed with funds from the NAND sale. Yet now the company has reported results that are well down on original expectations, casting doubt over how soon the company can return to being a safe bet for investors. The stated ambition is to reach profit margins of at least 10% when the five-year plan concludes in 2023, but during 2017 that figure stood at 1.6% after the NAND business was removed from the calculation.
Costs incurred from failing to sell the UK nuclear part of the business, NuGeneration, and pulling out of a liquefied natural gas contract, have hit company finances, and exacerbated the downgrade in operational profits. A serious problem, however, is that amid wider economic uncertainly in the global economy, the company is going to be more dependent on the remaining business performing well to provide good overall results. That results have been disappointing reveals Toshiba is still laboring under fundamental weaknesses that require much time to solve. Lower operating profits, therefore, places stress on the turnaround plan due to begin soon.
Prospects of the turnaround plan succeeding have been improved by crucial structural reforms to the business. Conglomerates have a habit of spreading into many different business areas, and in some capacity this trend was responsible for bringing about such an excessively risky bet on nuclear power made when the purchase of Westinghouse was completed. Whilst the returns on an improved structure will take time to materialize, profitable parts of the business are prospering, helping to convince the stock market that the company has entered the beginning of what at best will be a lengthy recovery.