Tokyo Ohka Kogyo (4186) - Confidence Despite the Unfortunate FY16 Guidance

Tokyo Ohka Kogyo’s (TOK) shares reacted negatively to its earnings announcements on February 3 and May 10. Not only did FY15 Q4 disappoint, but guidance for a 38% decline in OP to ¥7.7bn in FY16 was at variance with expectations. 
During the last ten years, TOK has steadily improved its positioning and has expanded margins. Unfortunately, though, earnings have tended to suffer setbacks every few years because of external shocks. Reasons for a setback in FY16 include higher fixed costs, but the appreciation of the yen is the largest factor punctuating growth. 
Analysts have tended to view TOK’s guidance as conservative, including its initial assumption of ¥105 to the US$ (OP gearing for one yen is ¥200m). Ultimately, though, management’s aggressive-looking plan for FY17 ~ FY18 is the key issue. If TOK can show investors that it is capable of executing, the shares hold large recovery potential. We estimate a CAGR for OP of 26% for FY17~FY20.  

Key Points

• TOK sees high growth potential for ArF and KrF photoresists used in leading-edge processes for logic, memory, IC packaging and RF devices.
• Plans are supported by improving relationships with leading manufacturers of logic, NAND, DRAM, and MEMS devices.
• Management believes it can implement a recovery in the equipment business. In addition, it sees high growth for a new product group (sales to grow from ¥214m in FY15 to ¥5bn in FY18), including a novel processed film for IC applications.
• Valuations are somewhat mixed, in part a reflection of TOK’s high cash position and relatively low ROE. We estimate a FY16e PER of 22.1x, but PBR of 0.8x and EV/OP of 8.4x. Based on recently raised guidance for shareholder returns to a minimum of 40%, we estimate an increase in the dividend from ¥64 in FY16 to over ¥100 by FY19.