Higher Material Cost Drags TDK’s Profitability, but Sensors’ Revenue Expansion Is a Plus

Our impression of TDK’s June quarter results is mixed. On the positive side, margin improvement in passive components and sensor application products segments was better than expected. Meanwhile, on the negative side, the operating margin contraction of the energy application products segment was worse than anticipated, owing to the weaker smartphone production and increasing cost of raw materials such as cobalt. As the negatives exceeded the positives, TDK’s June quarter operating income of JPY 30.8 billion was below our expectation of JPY 35 billion. Despite the somewhat disappointing result, we think the battery segment’s profitability would improve in the following quarters as production volume should recover and the higher material costs will be partly passed over to clients. We will review our numbers after meeting with the company in mid-August and maintain our fair value estimate of JPY 17,500 as well as our no-moat rating for now.