TDK Earnings: Lower Valuation by 6% Due to Weak HDD Demand, but Growth Outlook on Auto MLCC Intact

At the June-quarter earnings results, TDK 6762 lowered its fiscal 2023 (financial year ending March 2024) full-year operating income guidance from JPY 190 billion to JPY 150 billion, due to the lower-than-expected demand. The company lowered demand forecasts for most applications, including those for autos and IT equipment, but the revision to hard disk drive shipment forecasts in particular was largely due to stagnant demand for servers. It is disappointing that the company revised its full-year guidance in the first quarter of this fiscal year, implying that the demand outlook was too optimistic. Based on the lower-than-expected June-quarter earnings and the revised full-year guidance, we lower TDK’s fair value estimate to JPY 6,500 from JPY 6,900. However, we maintain our view that TDK’s shares are undervalued as our growth outlook for auto multilayer ceramic capacitors and magnetic sensors remains intact. We expect TDK’s operating margin to rebound from the September quarter, which could be the near-term catalyst for the stock.

The company lowered its sales forecast for the passive components segment for this fiscal year from a 9% to 12% growth to a growth of 2% to 5%. However, we are not too much concerned as the downward revision is mainly due to the lower revenue assumptions for inductors used in autos and high-frequency devices used in smartphones, but on the other hand, the company still expects low-to-mid-teens revenue growth for MLCC, which is the main driver of the segment. The company is maintaining its aggressive capital expenditure plan for MLCC to increase production capacity by 20% this fiscal year and another 20%-25% in the next fiscal year, which we believe is supported by strong confidence in the strong demand outlook for electric vehicles. We forecast sales growth of 4.5% and 7.1% for fiscal 2023 and 2024, respectively.