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Morningstar | Nabtesco Posts Mixed Results as Goodwill Impairment Hurts Bottom Line, FVE Lowered

Wide-moat Nabtesco posted mixed second-quarter results with the write-off of goodwill related to its German mechatronics subsidiary Ovalo dampening income on top of slowing growth in its precision gears sales. However, on the bright side, full-year group sales guidance was only marginally changed and excluding the goodwill write-off, 2018 operating profit margin should only decline slightly to 10.2% from 10.4%. In fact, first-half net profit would have made up 48% of our original full-year estimate. After including the write-off, we cut our 2018 net profit by 14% but we've also lowered assumed growth and slowed margin gains in subsequent years leading to 5% and 3% reductions in 2019 and 2020, respectively. As a result, we see five-year operating income CAGR at 5% instead of 7% previously. Our fair value estimate is reduced to JPY 4,130 from JPY 4,400, but we think Nabtesco remains inexpensive at the current level. Although sales growth has disappointed this year, we think worries over slowing growth are already reflected in its current share price.

The transportation solutions segment, which makes up over 27% of revenue, saw second-quarter sales drop 5% year over year. We think confusion from the trade war is likely to have a lingering impact on European car production and this was a key reason for the JPY 5,240 million write down of Ovalo. Nabtesco has cut its 2018 net profit guidance to JPY 23,600 from JPY 25,700 to reflect the write-off.

For the majority of its segments, the orderbook backlog remains promising but growth has slowed to 3% year over year in the second quarter after growing 6% in the first quarter and 24% in 2017. We think this indicates that growth may only be in the mid-single digits in the near term, which we reflect in our forecast. To some extent, the slower growth in its precision gears sales is not a surprise given that the general industrial robotics industry had been guiding for slower year-over-year growth.

Nabtesco doesn't hold its results briefing until Aug. 7 and if there is lingering risk, we suspect that it would be to the transportation solutions segment. Although we forecast sales growth to rise to 7.4% in 2019 from 6.6% in 2018 for this division, the driver is dependent on a pick up in aircraft-related orders. However, for the time being, the company's orderbook backlog as of end-June supports our current growth assumption.