NOK (7240): Seals Business Stable; Apple Business – Anchor or Angel?
Cash flow is trending near historically high levels for NOK as depreciation is up 50% over the past 4 years to actually exceed OP; FY16 company- guided depreciation of ¥44bn is 27% higher than guided FY16 OP of ¥35bn (PSA projects ¥37.4bn, on good Seals Division profitability).
The Ebitda peak of ¥100bn in FY14, and the current ¥80bn-plus level, compare well to the prior ¥71bn peak of FY04 and the ¥64.6bn average between FY10-FY13. Some 60% of Ebitda comes from the Seals division, which looks very stable given NOK’s commanding 80% share in auto-related seals and its 70%+ share of general seals, including that for construction machinery and robots.
As NOK is essentially a two-product company, split between Seals (45% of sales) and FPCs (50% of sales, with the remaining 5% from printer rollers and industrial lubricants), NOK’s earnings outlook can be thought of as “50% steady.” The FPC business is difficult because of its heavy reliance on Apple (44% of FY15 FPC sales; 28% FY14). Our FY17 projections assume that structural changes to next year’s iPhone will entail higher unit values for FPCs and better profitability, though if 2017 iPhone sales falter, FPC profitability may show little improvement over FY16. Either way, we see FY16 as the bottom for FPC earnings.
Key Points
- Oil seals ahead of plan on strong Japan vehicle engine volumes
- FPCs could see upside if iPhone 7 sells well
- July saw numerous spec changes weigh on Q2 FPC profitability
- Architecture changes to next iPhone to boost FY17, we believe
- Ebitda remains at high levels though OP is half the FY14 peak.
- Valuations reflect weak OP but cash flow is strong: PER at 15x our FY16 numbers is just above the middle of NOK’s trading band while EV/OP of 9.8x is 5-10% below the auto components sector average.
- Our bull case scenario generates an attractive EV/OP of 6.5x for FY17.
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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