Morningstar | Murata’s Margin Expansion Is Not Fully Embedded in the Current Share Price; Retain FVE of JPY 24,000
Murata Manufacturing’s operating income for the June quarter was JPY 48 billion, which is in line with our forecast of JPY 50 million. While revenue and profits came in within expectations, we are impressed that orders for capacitors in the June quarter increased 42% from the previous year, and orders have been exceeding sales for 10 consecutive quarters, which is the longest in its history, suggesting intense demand for multilayer ceramic capacitors, or MLCCs. At the earnings briefing, the management mentioned that Murata is asking clients to accept a price hike for MLCCs because of the increasing material costs and capital expenditure. Considering the massive demand and limited capacity expansion, we believe that the company will succeed in raising the price, which should contribute to lifting its operating margin in the next fiscal year. We thus retain our fair value estimate of JPY 24,000 and our narrow moat rating. We believe that shares are undervalued at the current share price, as margin expansion on MLCCs and communication modules is not fully priced in.The operating margin of the components segment increased to 24.2% from 23.4%, but we assume that it is substantially above 30% excluding the negative impact of the unprofitable rechargeable-battery business, which was acquired last September. We think the margin expansion is driven by the improving product mix and larger production volume of MLCC, which will continue in the following quarters.
Meanwhile, the modules segment was approximately at the break-even point, owing to decreased iPhone production and MetroCirc's operating loss. However, we forecast that the margin will improve from the September quarter, as MetroCirc's production problem is mostly resolved, and we estimate that Murata will start providing new radio frequency modules for the latest smartphones. As a result, we forecast that Murata’s entire operating margin will improve to 18.4% in fiscal 2020 from 11.8% in fiscal 2018.
Murata Manufacturing is mainly engaged in the development, manufacture and sale of electronic components and modules in Japan, North America and certain other Asian and European countries. Co.'s products are sold mainly to electronics companies for use as components in telecommunication, computer, audio, video, automotive electronics and other electronic products. Co. is engaged in the development, manufacture and sale of electronic parts and related products, including components for capacitors and piezoelectric products, as well as modules products; the provision of welfare services, personnel services, education and training services, as well as the leasing and management of real estate.
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