Denso (6902) FY17 Q1 Results Comment – Cost Cutting Commences
Key Points
- FY17 Q1 OP was around 15% (¥17bn) above plan according to management – ¥9bn from higher sales and ¥8bn from cost reduction.
- Q2 guidance assumes the ¥8bn cost reduction savings achieved in Q1 will be needed for other expenses, which sounds unlikely.
- Management seems confident H1 OP will come above the newly revised guidance (H1 OP raised 15%, full-year OP 8%, implying H2 OP raised 3%) thanks to the strong sales environment.
- Guidance upgrade mainly based on improvement in the Japan and Asia segments, but our impression is that all segments will outperform (e.g., Toyota (7203) doing well in Europe and Denso only assume a EUR/JPY rate of ¥121).
- China, Japan and Asean sales were all firm and management is confident Asean demand will help the Asia segment come above upgraded guidance
- By customer, Toyota was key as new products allowed over 6% Q1 sales growth vs Toyota’s own unit growth of less than 2%
- Denso believes it is ready to surpass the Germans in ADAS after lagging technologically these few years due to a cautious approach
- TD Mobile acquisition to contribute from H2
- Denso at long last seems to be ready to improve OPMs once again after several years of spiralling costs and relatively little cost reduction
- Valuations still not expensive at 14.8x PER and EV/OP under 11x on guidance, which is around 10% below the historical range
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
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