Showa Denko (4004) Results Comment – Ripples From an Unexpectedly Large Upward Revision
Showa Denko (SDK) shares surged 9.2% after the long delayed FY16 earnings announcement, at 2pm not only cleared the air regarding the accounting risks but came with a large upward revision to guidance. Shares of jointly beleaguered subsidiary Shoko Co. Ltd (8090) also rose (+6.8%), but of more import may be that petrochemical shares such as Mitsui Chemicals (4183) (+1.1%) moved up noticeably from 2pm, as did TDK (6762) (+1.7%) in the HDD chain.
Key Points
- The largest reason for higher guidance, compared to what SDK explained on February 14th, is resilient Asian petrochemical markets (please refer to figure on the next page). SDK left H2 numbers untouched, which implies still higher upside potential to earnings.
- FY17 H1 HDD media volume growth is now estimated at 25% YoY, on better PC and enterprise demand, while graphite electrodes (GE) in the Inorganic Materials Segment are likely to improve, allowing for some time lag. Management expects stronger LiB markets in China in H2 as government support for EVs becomes clarified.
- Valuations do not look extended. Against FY17 guidance, the shares are trading on a PER of 10.9x, EV/OP of 11x and PBR of 0.9x.
- Risks include the possibility of weaker eventual conditions in both petrochemicals and HDD markets. Additionally, the estimated impact of the proposed acquisition of the SGL Group’s GE business is not yet included in guidance. We will reassess our estimates after further reviewing details.
- A table showing SDK’s quarterly earnings trend and changes to FY17 guidance is included in this note.
Showa Denko is a chemical producer. Along with its affiliates Co. is mainly engaged in the manufacture and sale of petrochemicals, chemicals, electronics, inorganic materials and aluminum. Co.'s principal products include olefin, such as ethylene and propylene, as well as polyethylene and plastic products; industrial gases, including oxygen, nitrogen, argon and hydrogen gas; hard discs, compound semiconductors, rare earth magnetic alloys, and materials for lithium-ion battery; ceramics, such as alumina, abrasives and refractories; and carbons, such as graphite electrodes; ingots, sheets, extruded products, foils, beverage cans, building products 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.
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