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Morningstar | While Weak Guidance May Disappoint the Market, Murata’s Long-Term Growth Story is Intact. See Updated Analyst Note from 07 May 2019

While we understand that Murata Manufacturing’s weak guidance may disappoint the market, we believe the company is incorporating the worst-case scenario. While the numbers assume that demand will not recover after the ongoing inventory adjustment, Murata Manufacturing’s confidence to the long-term demand is intact, in our view. In fact, although Murata forecasts that revenue will remain flat and operating income will decline 18% for the new fiscal year, the company plans to continue aggressive capital expenditure, spending JPY 300 billion, or 19% of its revenue to increase production capacity for the future demand.

We trim our fair value estimate to JPY 7,500 from JPY 7,700 as we reviewed our growth assumption which we had been slightly overestimating, but we retain our long-term view that the company will benefit from the robust demand of passive components, which is driven by the auto digitalization and 5G diffusion.

Murata Manufacturing’s operating income guidance for the new fiscal year is JPY 220 billion, which is below our expectation of JPY 330 billion. While Murata forecasts 15.1% operating margin for the first half and 12.8% for the second half, we believe the guidance is unrealistic, since we expect a margin expansion to 18.6% in the second half as: 1) we view that the production utilization rate will recover in autumn after the inventory correction; and 2) we assume the product mix for multilayer ceramic capacitors, or MLCCs, will improve in the second half.

In addition, we believe Murata’s revenue guidance is also supporting our view. While Murata assumes auto and handsets unit shipments will remain flat from the previous year, the company guides 8% revenue growth for MLCC and 19% revenue growth for the auto industry, which implies that the contents growth story has not changed. In fact, Murata’s capital expenditure guidance is JPY 300 billion, which is at the historical high level for three consecutive years, planning to increase the MLCC production capacity for 10% per year, which also suggests Murata’s confidence in long-term demand. As a result, while we cut our operating income forecast for fiscal 2019 to JPY 275 billion from JPY 330 billion to factor in the longer-than-expected inventory adjustment, we do not make substantial change to our long-term forecast numbers.