Yageo Earnings: Sluggish June-Quarter Outlook Implies Prolonged Inventory Correction

While Yageo’s 2327 March-quarter numbers were largely in line with our expectations, the company’s outlook for the June quarter was lower than we had anticipated. Despite the seasonality, the company expects little recovery in the June quarter. This suggests that demand is still weaker than we expected, due to heavy inventory in the supply chain. In particular, sluggish sales of tantalum capacitors may last longer, due to their greater exposure to the PC market. Meanwhile, we maintain our long-term view that the company will benefit from the growing auto demand, as evidenced by Yageo’s announcement in mid-April that it would invest EUR 205 million in North Macedonia, where Yageo already operates two plants that mainly produce multilayer ceramic capacitors for autos. We will review our earnings forecasts after speaking with the company later this month, but we maintain our view that Yageo’s shares are undervalued.

Yageo’s March-quarter revenue was down 9.5% sequentially, in line with our 8.8% decline forecast and high-single-digit decline guidance. Its gross margin of 33.0% was slightly lower than our forecast of 33.5%, as we estimate that sales of tantalum capacitors fell more than we expected. However, Yageo’s operating margin of 18.9% was above our expectations, due to better cost control.

For the June quarter, the company guides revenue to be flat to slightly up sequentially, which is somewhat disappointing given the fewer working days in the March quarter. The company also mentioned that utilization in the June quarter will be similar to the March quarter as it continues to focus on working down excess inventory in the supply chain. So although the inventory correction is taking longer than we anticipated, considering Yageo’s inventory decreased by 6% in the March quarter, we expect to see more inventory reductions in the June quarter. Therefore, we maintain our view that now is the bottom of utilization and that it would recover in the second half of this year.