Nabtesco Earnings: Margins Better than Expected and Continue to Project Stronger Recovery in 2025

Nabtesco’s component solutions segment’s, or CMP’s, March-quarter operating margin of 3.6% was a positive surprise, as cost pass-throughs mitigated the impact of weaker capacity utilization and higher fixed costs from the new factory for the reduction gear business. As CMP’s margins would not weaken as much as we had expected, we raise Nabtesco’s operating income estimate for fiscal 2024 by 14% to JPY 13.5 billion, implying a 5.5% revenue decline and 4.3% operating margin. Nonetheless, our outlook of a stronger recovery of reduction gear sales/capacity utilization from 2025 remains unchanged; therefore, we maintain our fair value estimate of JPY 3,500 per share. Although we expect CMP’s sales/utilization levels to remain low while its main customers, Fanuc and Yaskawa Electric, digest their high inventories, we expect the adjustments to be completed in the December quarter of 2024. As the market underestimates CMP’s prospects from 2025, we believe wide-moat Nabtesco’s shares are undervalued.