Sumco (3436): Can Management Learn from History?
It seems Sumco may well have learned a bitter lesson about managing markets, after it overinvested in 300mm wafer capacity from FY05-FY08. As far as the company’s foreign exchange hedging is concerned however, management appears to be repeating poor judgement evinced in FY13. FY17 Q1 guidance could well disappoint.
The shares are up 2.3x since June 2016, on the weaker yen, and expectations of 300mm wafer price hikes. Valuations strike us as stretched. The market appears to be discounting a recovery well into future years, yet NP growth will likely be slowing considerably by FY19 as the corporate tax rate normalizes.
Key Points
- We here raise our FY17OP estimate from ¥15bn to ¥27bn. We now assume 300mm price hikes of 6% in FY17 instead of 2-3%, and ¥/$116 instead of ¥/$103. Gearing is ¥0.7-¥0.8bn per one yen to the dollar.
- FY17 Q1 guidance may prove disappointing. While OP should expand with the weaker yen, we expect much of the benefit to be erased by non-operating losses because of an aggressive forex hedging program.
- Sumco management, wisely, would like to see a steady and orderly 300mm wafer market recovery. The number of wafer suppliers has declined, but overly aggressive investment could still occur. We discuss market entry strategies by China which could eventually disrupt wafer market balance.
- Sumco’s valuations appear demanding. We estimate a FY17 PER of 29x, PBR of 1.9x and EV/OP of 16.8x. By comparison, for Shin-Etsu Chemical (4063) we estimate a PER of 21x, PBR of 1.8x and EV/OP of 12.0x. We expect Sumco’s dividend to grow to only ¥25 in FY20, compared to ¥20 in FY15.
SUMCO is a manufacturing company that is mainly engaged in the high-purity silicon business. Along with its subsidiaries, Co. is involved in the manufacture and sale of various silicon wafers for semiconductors, including polished wafers, epitaxial wafers and special wafers; the production and sale of wafers; and the provision of technical and sales marketing support services in overseas markets, including the U.S., the U.K., Indonesia, Singapore, Taiwan and South Korea. In addition, Co., through its subsidiaries, is engaged in the finance and personnel services in the U.S.
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.
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