Morningstar | Assuming Steeper Slowdown in 2019-20 for Nabtesco, Our FVE Cut to JPY 3,800; Still Attractive. See Updated Analyst Note from 27 Sep 2018
We cut Nabtesco's fair value estimate to JPY 3,800 from JPY 4,130 after factoring in the risk of lower margins due to a decline in operating leverage as growth in sales of precision gears to the auto segment eases. Nabtesco’s plant utilization, while still over 100%, is down from 2017’s lofty levels, and with uncertainty over global demand in 2019, and the company’s own capacity expansion coming on stream in 2020, we see a risk of plant utilization declining to around 95%-100%. This leads us to cut our 2019-21 earnings estimates by 4%, 27%, and 17%, respectively. However, our mid- to long-term expectations are little changed. We still see positive prospects for demand for Nabtesco’s precision gears, with China’s need to mechanize expected to support global industrial robotics demand. We think the recent sell-down in Nabtesco has more than encompassed what we see as the near-term risks to earnings, and shares are still attractive at the current level.Our assumptions include a slowdown in precision gear sales growth from 12% in 2018 to 6% in 2019 before a rebound in 2020 and 2021 to midteens growth as the new capacity comes on stream. Thereafter, we forecast 5%-6% growth for the remainder of our explicit 10-year forecast. We think strong 10%-15% sales growth in gears to the nonauto sectors will be offset by a slowdown in auto capacity expansion globally, reflecting the potential risk of ride-share programs eating into car ownership, as well as maturing growth in China’s auto demand. We also see China’s overall construction growth easing on demographic trends and have assumed no growth going forward for its sales of hydraulic gears.
With the risk of lower operating leverage, we assume operating margins will be negatively affected and see margins peaking in 2018 at 11.7% (before charges) and declining to 9.7% in 2019 and 7-8% in 2020-21 as new capacity ramps up. We are comfortable with these assumptions, as the firm's low margin in the financial crisis was 6%-8%.
Nabtesco is engaged in the design, manufacture, sales, and repair of industrial machinery and components. Co. operates in three business segments: component solutions, transport solutions and accessibility solutions. Co.'s principal products are high precision reducers and actuators for industrial robots, construction machinery, solar tracking equipment, automatic door drive units, automobile air-break systems, automatic testing/training equipment, connecting device, various types of actuators, remote control systems for marine vessels, automatic door systems, smoke exhausting systems and platform safety system as well as nursing care equipment and industrial equipment.
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