Electrification And Solid State Batteries Will Drive Powerful Long Term Upside

Catalysts

About Maxell

Maxell develops and manufactures energy solutions, functional materials, optical and systems products, and value co creation businesses with a focus on analog core technologies.

What are the underlying business or industry changes driving this perspective?

• Expansion of primary battery demand in automotive, medical and infrastructure applications, combined with the planned acquisition of Murata's primary battery business, is expected to materially increase scale, customer reach and pricing power. This is seen as supportive of sustained revenue growth and higher operating margins from FY 2026 onward.
• Growing electrification of vehicles is driving strong demand for coated separators for EV and hybrid EV, where Maxell is already seeing steady sales and profit growth, positioning the Functional Materials segment for structurally higher revenue and improved segment margins.
• Rapid commercialization and scaling of all solid state batteries, including high capacity and high heat resistant variants and adoption in industrial robots and advanced sensing, can unlock new high value applications and premium pricing, potentially lifting long term earnings and return on invested capital.
• Advancement and potential normalization of high margin licensing revenues in the Optics and Systems segment, with a proven ability to pull revenue forward, provides an earnings growth lever that requires minimal additional capital. This is seen as supportive of net margin expansion and stronger free cash flow.
• Strategic shift of production for tariff exposed products from China to Japan, together with schemes to pass higher raw material costs into selling prices, should gradually reduce external cost and policy risks, stabilizing gross margins and supporting more predictable profit growth.

Assumptions

This narrative explores a more optimistic perspective on Maxell compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Maxell's revenue will grow by 6.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.0% today to 7.6% in 3 years time.
• The bullish analysts expect earnings to reach ¥11.9 billion (and earnings per share of ¥328.44) by about December 2028, up from ¥5.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥9.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, down from 17.0x today. This future PE is lower than the current PE for the JP Electronic industry at 14.8x.
• The bullish analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural slowdown and intensified competition in semiconductor related products and tapes for semiconductor manufacturing processes could persist beyond management’s expectation for a recovery after FY 2025, weighing on the Functional Materials and Optics and Systems segments and constraining long term revenue growth and operating profit expansion.
• The discontinuation of rechargeable battery production, combined with only gradual scaling of all solid state batteries, may leave the Energy segment overly dependent on mature primary battery demand, limiting the company’s ability to capture higher growth and higher margin opportunities and capping long term earnings growth and net margins.
• Ongoing U.S. tariff measures and a potential broader global economic slowdown, particularly in consumer facing categories such as health and beauty care products and Chinese made shavers, could represent a durable drag on the Value co creation businesses and reduce group level revenue and operating profit resilience through the cycle.
• The reliance on advancing high margin licensing revenues from future periods into the present to support results may not be sustainable as a long term earnings driver, and any normalization or decline in these licensing inflows would pressure net margins and free cash flow, especially if fixed costs continue to rise.
• Delayed recovery in automotive optical components, in car camera lens units, and LED headlamp lenses, together with challenges in establishing new automotive customers, could indicate a secular shift in the competitive landscape for Optics and Systems, constraining this segment’s pricing power and limiting group revenue growth and earnings scalability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Maxell is ¥3000.0, which represents up to two standard deviations above the consensus price target of ¥2341.67. This valuation is based on what can be assumed as the expectations of Maxell's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥3000.0, and the most bearish reporting a price target of just ¥1800.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ¥157.6 billion, earnings will come to ¥11.9 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of ¥2413.0, the analyst price target of ¥3000.0 is 19.6% 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.