EUR 850.00 For Business Accounts Only

Morningstar | Contents Growth on Auto Mitigates Weak Smartphone Production; Murata’s Shares Undervalued. See Updated Analyst Note from 04 Feb 2019

While we trim our fair value estimate for Murata Manufacturing from JPY 24,000 to JPY 23,000 to factor in the weakness of smartphone demand, we will retain our view that Murata will continue to benefit from the electronic contents growth, driven by the diffusion of auto digitalization. Murata’s December quarter results were encouraging, which implies that robust demand from the auto industry is mitigating the negative impact of the economic slowdown and prolonged smartphone replacement cycle. In fact, revenue for multilayer ceramic capacitors, or MLCCs, increased approximately 25% from the previous year, and we estimate that most of the growth is from improved product mix and better pricing, which is underpinned by the tight supply-demand balance. Murata’s shares are approximately 20% below the recent peak in summer 2018, but we view that the market is overlooking the solid MLCC demand, and thus we believe that shares are undervalued.

Since last June, Murata has been negotiating with clients to raise the price of MLCC, as the company is not able to fulfill increasing demands in the longer term, especially from auto. Murata mentioned at the earnings briefing that the price hike is accepted by clients as expected despite the ongoing economic slowdown, which is in line with other MLCC suppliers’ outlooks. Moreover, Murata suggested that the company will retain its plan to spend JPY 250 billion-JPY 300 billion of capital expenditures for the next fiscal year. Overall, we believe Murata’s confidence on long-term MLCC growth will encourage the market.

Meanwhile, we are lowering our operating income forecast from JPY 280 billion to JPY 275 billion for this fiscal year and from JPY 360 billion to JPY 350 billion for the next fiscal year, which is the reason to revise our fair value estimate from JPY 24,000 to JPY 23,000. While we believe that Murata’s expertise in RF components will contribute to expanding the communication module business along with the diffusion of 5G in the longer term, the business will be stagnant for the time being, as we forecast weak smartphone demand in 2019.