EUR 850.00 For Business Accounts Only

Morningstar | 5G and Auto Digitalization Continue to Benefit Murata in the Long Run; Shares Undervalued

Narrow-moat Murata Manufacturing’s September quarter operating income was JPY 91.3 billion, which was 56% above the previous year’s number, and exceeding our forecast of JPY 83 billion. We estimate that: 1) better-than-expected product mix contributed to the margin expansion of MLCC; and 2) higher utilization rate and better production yield contributed improving the profitability of communication modules. We consider September quarter results support our view that Murata will leverage its expertise on passive components and benefit from the diffusion of auto digitalization and 5G communication in the longer term, and the future growth is not fully priced in. We will therefore retain our fair value estimate of JPY 24,000.

While some companies suggest economic slowdown in China, Murata expects that auto digitalization will continue to drive the robust demand of multilayer ceramic capacitors, or MLCCs. In fact, Murata Manufacturing raised its MLCC revenue growth forecast for this fiscal year from 14% to 29%, even though its volume growth assumption is unchanged at 10%, suggesting that Murata can improve its product mix much better than the original forecast. We assume that suppliers have not been able to satisfy demands, as Murata’s MLCC order has been exceeding the sales for 11 consecutive quarters, and order backlogs increasing to JPY 196 billion from JPY 34 billion over the past three years, which we observe similarly on TDK and Taiyo Yuden. We forecast that MLCC production will grow in low-teens percent, while demand grows in high-teens, which is the reason for Murata Manufacturing to ask for a price hike to customers first time in 18 years, and its competitors are following the trend. We estimate that Murata’s MLCC market share is 40%, and even well positioned on the premium products. Given these factors, we believe that price hike will succeed and contribute improving Murata’s operating margin next year, which supports our midterm view.

Operating margin of the modules segment improved to 11.4% from negative 0.6% of the previous quarter, as we assume that Murata got new modules orders for iPhone, and Murata improved the production yield of its new substrate, MetroCirc, which has been dragging down its margin for the past three quarters. We forecast that Murata will expand its share on communication modules in the longer run, as MetroCirc has an advantage on new spectrums used on 5G communication, which is not embedded to the current share price, in our view.