Morningstar | Denso’s Fiscal 2Q 2019 Results Slightly Miss; Shares Are Undervalued to Our JPY 6,800 FVE
Narrow-moat Denso's JPY 61.5 billion operating profit, down 45% year on year, in the September quarter was slightly lower than our expectation, due to higher investment expenses in new technologies despite revenue growth remaining upbeat at 8%. That said, management seems to be optimistic for the near-term outlook and slightly revised up its full-year operating profit forecast by 0.8% to JPY 393 billion, largely in line with our estimate.Our fair value estimate for Denso remains unchanged at JPY 6,800 per share, as we believe it will benefit from the ongoing electrification and auto-drive development in the automobile industry. The company’s continuous innovation will sustain its technological lead as one of the tier-one global suppliers. We anticipate Denso’s revenue and operating profit to grow at a compound annual rate of 5% and 4%, respectively, through fiscal 2023, with gross margin and operating margin averaging at 15.6% and 7.5%, respectively. We think the shares are undervalued at current levels, as they are at a 25% discount to our fair value estimate.
Revenue was up 8% year on year to JPY 1,294 billion, slightly higher than our estimate, thanks to strong demand in the mobility and electronic systems. Geographically, the top line increased at double-digit rates in the Japan, North America, and Asia markets, while we saw 7% revenue growth in Europe.
In addition to 1.3-percentage-point gross margin declines, operating expense ratio lifted 2 percentage points, owing to higher-than-expected research and development expense leading to a 4.5 percentage points drop in operating margin in the fiscal second quarter. Operating profit and net profit plunged 45% and 52.5% year on year, respectively, to JPY 61.5 billion and JPY 36.8 billion.
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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