SMC (6273): Expanding Global Share
SMC’s strategy of expanding global market share is impacting short-term margins. Global market share reached 34% in 2015 based on a ¥120/USD exchange rate, with market share higher if a stronger yen rate is employed. We see above plan sales for FY16 on firm Asia demand, but below plan margins on the strong yen plus rising fixed costs which include an ever-expanding salesforce.
Management concisely summarises its somewhat disappointing FY15 as having had a strong Q1 followed by an Asia slowdown in Q2 and Q3, then closing with a modest demand rebound across all regions in late Q4. This rebound is apparently continuing as of early FY16. We forecast above-guidance FY16 Q1 sales but expect a 25% YoY drop in FY16 OP as the company chooses to absorb a significant portion of the strong yen in its overseas pricing. Some 57% of Japan production is exported, with exports ultimately comprising a third of consolidated sales.
Yen rates play a key role in market share and profits at SMC. Our report assumes the ¥108/USD rate employed by the company for FY16.
Key Points
- Good sales start to FY16 and costs remain low in Q1
- However, costs do rise later in the year, according to management
- Global market share rising annually: 34% as of 2015
- Margin pressure likely from pricing to offset the strong yen
- Fair value could be a PER of around 20x (our FY16e PER 18.7x; FY17e 19x). SMC’s FY16 EV/OP of 12.3x is at a well-deserved premium to the machinery sector average which currently stands at 10.5x, and is in line with the Topix (ex-financials) FY16 average EV/OP of 12.2x.
SMC and its subsidiaries are engaged in the manufacture and sale of pneumatic control equipment and other automatic control equipment. Co.'s principal products are directional control valves, such as air-operated valves, hand valves, power valves and solenoid valves; actuators, such as air cylinders, guided actuators and air grippers; air preparation equipment, such as air dryers, air mist separators, aftercoolers and air tanks; and air line equipment, such as air filters, air filter regulators, lubricators, modular filter regulator lubricator units, electro-pneumatic regulators, sensors and switches. In addition, Co., through its subsidiaries, is engaged in the warehousing business.
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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