Morningstar | Denso's Fiscal 1Q19 Earnings Were Largely in Line; Our FVE Remains at JPY 6,800 per Share
Despite better-than-expected revenue growth, narrow-moat automotive component maker Denso's fiscal first-quarter earnings (ending June 2018) were largely in line with our expectations, with EBIT down 2.4% (versus our negative 3% forecast) from the year-ago quarter to JPY 90.9 billion. Thanks to strong demand in its mobility system products (up 56% from last year), such as advanced driver assistance systems, or ADAS, applications, revenue increased 14% year on year to JPY 1,331 billion.However, the operating profit declined 2.4% year on year to JPY 90.9 billion, with operating margin sliding to 6.8% from 8% a year ago. This worse-than-expected operating margin was mainly owing to higher R&D expenses and investment costs for the production expansions in North America. Net income increased marginally by 0.8% year on year to JPY 77.3 billion.
We increase our five-year revenue growth forecast to 4.4% from 3.9% previously and lower our average operating margin assumption to 7.9% from 8% previously. Our fair value estimate for Denso remains at JPY 6,800 per share after taking into account the changes, implying a 17.5 times 2019 earnings and 7.2 times EV/EBITDA. We think the shares are inexpensive at current levels, trading at 0.81 price/fair value estimate.
The company seemed more optimistic about its outlook for the fiscal year ending March 2019, as it revised up its financial guidance following first quarter results. It now expects full-year revenue to grow 5.7% year on year to JPY 5,400 billion (versus prior forecast of JPY 5,320 billion) and operating profit to decrease 5.5% from prior year to JPY 390 billion (versus prior forecast of JPY 376 billion). Capital expenditure is expected to rise to JPY 400 billion from last year's 347 billion, and the R&D expenditures are estimated to increase to JPY 495 billion from JPY 447 billion. Denso also expects to take a hit of up to JPY 80 billion this year if the U.S. raises the autos and auto parts tariffs to 25%.
Denso and its affiliates are mainly engaged in the manufacture and sale of automobile electronic, electrical parts, and other components. Co.'s principal business segments are powertrain control systems, electronic systems, thermal systems, information and safety systems, small motors, industrial systems and consumer products. Co.'s principal products include starters, alternators, engine management systems, components for gasoline, diesel and electric hybrid vehicles, engine ECUs, hybrid ICs, air conditioners, radiators, remote keyless entry controllers, car navigation systems, car-mounted ETC devices, motors, bar code handy scanners and industrial robots.
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