Murata (6981): Rethinking the Module Conundrum

2H FY16 and both 1H and 2H FY17 should see Murata enjoy the benefits of its leadership in both MLCC and SAW technology, both of whose roles are expanding, courtesy of increasingly complex RF designs for 4G. However, with enterprise value for Murata now at ¥3.3tril, these businesses are not big enough to impact earnings to a point where valuations are compelling. Meanwhile, although Murata’s R&D position means that it is well-placed to benefit from the IoT / M2M market as that develops, since it is starting from a small base, these businesses cannot kick in immediately.  
To drive earnings higher in FY18, it is Murata’s communications module business which must come alive; Murata has spent FY15 and FY16 playing catch-up, and making bets that haven’t paid off. As a consequence, FY17 is expected to see a back-to-basics approach by the company in this area. Elsewhere, if the firm can get some solid wins in Low Band PAMiD, while developing its IHP SAW technology for higher bands, OEMs should feel comfortable with giving Murata a bigger slice of the RF Module pie from FY18 – which is just what investors want.   

Key Points

• Murata’s market share wins in MLCCs and SAW devices – masked by currency moves in 1H FY16 – are now more becoming apparent…
• …these gains should continue with the increased penetration of ultra-high-end handsets into the market.
• From FY18, though, the company needs its communication modules business to come good.
• Most encouragingly, the company appears to be learning from mistakes made in 2016; and with a superior product based on IHP SAW technology, it should be much more competitive at the mid- and high-end PAMiD market.
• We have FY18 OP hitting ¥303.8bil (+21% YoY), generating an OPM of 23%, thanks to improving module earnings, putting the shares on an undemanding 11x EV/OP.