Expansion Into SiC Power Devices And Generative AI Demand Will Propel Revenue And Boost Margins

Key Takeaways

• Advancements in AI and proactive R&D investments could drive long-term revenue growth and improve operational margins.
  
• Expansion in production capacity and new technologies is expected to diversify revenue streams and enhance future earnings.
  
• High sales concentration in China poses geopolitical risks, while R&D expenses and share buybacks strain cash flow, impacting margins and long-term growth.

Catalysts

Engages in the development, manufacture, sale, repair, and maintenance of semiconductor manufacturing equipment worldwide.

• The anticipated recovery in demand for DRAM and NAND equipment driven by advancements in generative AI and other technology applications is expected to boost future sales revenue.
  
• Proactive investments in R&D and capital expenditures aimed at next-generation products could improve long-term revenue and operational margins.
  
• The ongoing expansion of the Tonami plant and expected future capital investments are likely to increase production capacity, potentially generating higher revenue and improved gross margins.
  
• Share buybacks could lead to an increase in earnings per share by reducing the number of outstanding shares, benefiting future earnings metrics.
  
• The expansion into new business areas, such as SiC power devices, and the development of new technologies could drive future growth and diversify revenue streams.

Kokusai Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kokusai Electric's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.5% today to 17.4% in 3 years time.
• Analysts expect earnings to reach ¥51.7 billion (and earnings per share of ¥226.33) by about January 2028, up from ¥31.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥58.3 billion in earnings, and the most bearish expecting ¥39.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, up from 15.7x today. This future PE is lower than the current PE for the JP Semiconductor industry at 30.0x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

Kokusai Electric Future Earnings Per Share Growth

Risks

• The high concentration of sales to China (47% in the second quarter), poses a significant geopolitical risk, particularly with potential export restrictions, which could impact overall revenue.
  
• Shift in sales composition and potential decrease in profitability from projects that were brought forward and one-off expenses, impact gross profit margins and overall earnings.
  
• The need for increased R&D expenses to support next-generation products may put pressure on net margins if not met by corresponding revenue growth.
  
• Delays in NAND equipment shipments and slower than expected recovery in NAND demand could lead to revenue shortfalls compared to projections.
  
• Significant outflows for share buybacks and treasury stock acquisitions strain cash flow and may negatively affect the company’s ability to invest in growth opportunities, impacting long-term earnings.

Valuation

• The analysts have a consensus price target of ¥3710.0 for Kokusai Electric based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥5000.0, and the most bearish reporting a price target of just ¥2600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥297.0 billion, earnings will come to ¥51.7 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 7.3%.
• Given the current share price of ¥2145.0, the analyst's price target of ¥3710.0 is 42.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.