Nabtesco Earnings: Component Solutions Business Capacity Utilization To Weaken; Shares Undervalued

Nabtesco’s 2024 operating income guidance of JPY 12.8 billion, or 4.0% operating margin, implies a 26% decline from last year and was a negative surprise, suggesting that the capacity utilization this year will be much lower than we had anticipated. Further, due to the weak December-quarter orders and higher inventory levels of the industrial robot manufacturers, we expect the inventory adjustment to take even longer than the company assumes and, accordingly, lower our 2024 operating income forecast to JPY 11.8 billion, or 3.7% operating margin, from JPY 18.2 billion previously. We also believe the company’s plan to return to a 10% operating margin in 2026 is optimistic, and we forecast an operating margin of 7.7%—which is lowered from 9.6% due to a lower capacity utilization assumption and higher-than-expected fixed costs from the recently constructed Hamamatsu plant. As a result, we lower our fair value estimate for Nabtesco to JPY 3,500 per share from JPY 4,000. While the firm's turnaround plan seems optimistic, we nevertheless believe that Nabtesco’s shares are undervalued as the market is overly pessimistic about the company’s medium-term margin recovery.