NOK (7240): At a discount to its sector; poised to recover
NOK is set to disappoint in its smartphone-related FPC division for a second straight year following record FY14 earnings. We argue in this report that even a slight recovery in FY17 volumes of iPhone sales could produce a major rebound in OP. Restoring smartphone-related volumes on a consistent basis is the longer-term issue, but at least for FY17 we see potential upside.
From Q4 FY15, the FPC division fell into the red on soft iPhone 6s sales, while FY16 has seen the additional issues of last-minute difficult iPhone 7 work which other suppliers could not manage. However, we think FY17 could see a return to “normalized earnings” for the FPC division, on a more innovative iPhone and better control of labour costs.
Beyond the FPC business, the mainstay Seals Division, where NOK and its German partner hold near-50% global share in automotive seals, remains stable, generating ¥32-33bn in OP annually since FY14. The recent strength in Japan and China auto production is a plus, with automation capex over the past year likely to boost FY17 Seals Division OP to a new record, creating a solid floor for earnings.
At current share price valuations, the FPC business is valued at near zero, as a return to profitability will require strong iPhone sales; a point over which the market remains cautious.
Key Points
- Mainstay Seals division boosted by rising trend in auto production
- FY17 should see the benefits of automation, particularly from H2
- Company guidance is overly conservative for the Seals business
- FPC division profits should normalize on upcoming iPhone
- Even a partial recovery in FPC profits would produce a substantial improvement in overall profits
- NOK trades on 10x PER and 7.5x EV/OP on our FY17 numbers, 20% below the auto component sector average
NOK is engaged in the manufacture and sale of seal products, industrial mechanical parts, rubber products, and others. Along with its subsidiaries and associated companies, Co. operates in four business segments: seal, electronic device product, roll, and others. Co.'s principal products include oil seals, O-rings, vibration controls, resin products, gaskets, chemical products, mechanical seals, flexible printed circuits, flexboards for digital cameras and cellular phones, flexible printed circuit-based panel keyboards, optoelectronics products, rubber rolls for office machines and equipment, special lubricants, and others.
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.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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