TDK (6762) – Can TDK Make InvenSense Make Sense?
TDK in effect swapped its RF assets for sensor technology, in its deal ceding RF to Qualcomm and subsequent acquisition of InvenSense. The Qualcomm deal results in unusually high OP in FY16 and FY19e, but we estimate that underlying earnings are continuing their steady growth.
We expect TDK’s new Sensor segment to start off with an operating loss of ¥7.5bn with the addition of InvenSense. Thereafter trends may improve rapidly as sensor markets appear poised for accelerating growth. As there are clearly doubts about InvenSense’s immediate outlook, though, TDK needs to do more to convince investors that its strategy is sound.
Some elements in FY17 guidance strike us as conservative, including the assumption of ¥108/US$, a 10% volume decline by HDDs, and low earnings growth by polymer LiBs.
Key Points
- TDK guides for sales growth in its ‘legacy’ sensor business of 27%~30% in FY17, having worked to get approvals from auto makers.
- Demand for passive components appears strong, particularly MLCCs for autos. LiB sales are supposed to grow by 8% ~ 11%, as TDK begins to target new markets such as power tools. HDD markets firmed during FY16, helped by tightness in NAND markets. Demand for HDD magnetic heads should benefit from growing nearline server demand and from its customer Toshiba’s (6502) increased market share.
- Valuations appear relatively modest. We estimate that the shares are trading on a FY17e PER of 14.8x, EV/OP of 12.4x and PBR of 1.1x. We believe TDK can hike its dividend from ¥120 to ¥200 by FY20.
TDK is a manufacturer of recording media, ferrite products and recording device products, and a producer of inductor, ceramic capacitor, magnet, HDD head and other components. Co.'s principal business segments are passive components, sensor application products, magnetic application products, film application products and others. Co.'s principal products include ceramic capacitors, aluminum electrolytic capacitors, film capacitors, inductive devices, high-frequency components, piezoelectric materials and circuit protection components, sensors, HDD head suspension, recording devices, power supplies and magnets, and mechatronics.
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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