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Morningstar | Murata’s Confidence on Auto MLCC and RF Modules Will Encourage the market; Shares Undervalued

We are encouraged by Murata Manufacturing’s information meeting for investors, as it supports our long-term view that the company will continue to benefit from the changing environment. Our key takeaways from the meeting are: 1) Murata forecasts that supply-demand balance for multilayer ceramic capacitors, or MLCCs, will remain tight because of the massive demand from auto digitalization; and 2) Murata is likely to expand its RF module business, owing to the increasing complexity on RF circuits to enable faster communication speed, including the diffusion of 5G. As a global top supplier of passive components, Murata has established a close relationship with major set makers, leveraging its rich product portfolio and expertise in telecom circuits, which we believe constitute an economic moat for the company. Overall, we think that the positive outlook shown at the meeting is in line with our view and above the market’s expectations, and thus, we reiterate our fair value estimate of JPY 24,000, providing 34% upside to the current share price.

Murata forecasts that its revenue from autos will grow at a high-teens percentage rate in the midterm. Safety and environmental regulations require autos to use more electronic devices, which is driving the growth of MLCC. In particular, much more MLCC will be necessary for electronic vehicles, autonomous driving, and ADAS, as these features require larger data processing power and complex control. Meanwhile, although MLCC is used for all electronic circuits, the number of suppliers is limited as automakers require a high quality standard for components to secure safety, and as a result, suppliers have not been able to fulfill increasing demand from auto so far. According to Murata, it asked customers to raise MLCC pricing for the first time in 18 years to enable additional investment, and 70% of customers are likely to agree on the price hike by the end of this fiscal year, which we believe will encourage the market.

We believe that Murata’s view on handsets is also above market’s expectations. Owing to the economic downturn, trade war, and prolonging replacement cycle, ongoing slowdown on smartphone demand has been the concern of the market. However, Murata believes that its revenue from handsets will grow in a high-single-digit percentage in the midterm because of the increasing contents per phone, as more MLCC will be necessary to support faster processors and more RF components will be necessary to enable faster communication speed. In particular, we are impressed with the company’s outlook to expand its share on RF module business in the midterm, leveraging its rich product portfolio, such as ceramic filters and LCP substrates. Being the top supplier of RF components, Murata Manufacturing has established a close relationship with handset makers and modem chip suppliers, which enables Murata to obtain the future roadmap of the communication technology and to collect key technologies faster than its peers. Overall, the positive outlook from the company supports our view that Murata possesses an economic moat in the business, which makes the firm able to achieve sustainable excess returns on capital in the changing environment.