Yageo Earnings: Margin Expansion and Recovery of PC Demand to Boost Share Price

No-moat Yageo’s December-quarter revenue and gross margin of TWD 27.4 billion and 34.5%, respectively, exceeded our expectations of TWD 26.3 billion and 33.2%, due to the two months of contribution from the acquired Telemecanique Sensors business. For the same reason, Yageo’s operating margin of 18.5% was lower than our forecast of 19.4%, due to the heavy operating expenses of the acquired business. We estimate that Yageo’s numbers, excluding the acquisition, were largely in line with our expectations. We have incorporated the impact of the acquisition into our forecast, which will add about 6% to sales after 2024. On the other hand, we have largely maintained our operating income forecast, as lower capacity utilization assumptions due to the prolonged inventory digestion will almost offset Telemecanique’s contribution to earnings. As a result, we maintain our fair value estimate for Yageo of TWD 750 per share and believe the shares are undervalued. We believe that the March quarter will be the bottom of the cycle, and we expect Yageo’s profitability to improve toward the end of the year as capacity utilization improves in the second half, and as Yageo improves the efficiency of Telemecanique’s operating expenses.