Investment In All-Solid-State Batteries Will Drive Future Advancement In Mobility And AI

Key Takeaways

• Strategic focus on Energy, Functional Materials, and Optics & Systems aims to improve growth and margins by investing in core profitable areas.
  
• Investments in new technologies and shareholder value enhancements aim to drive long-term revenue growth and attract investors.
  
• Decreasing sales and profitability across various segments pose risks to Maxell's revenue growth and margin sustainability.

Catalysts

Manufactures and sells energy, functional materials, optics and systems, and life solution products in Japan, the Americas, Europe, Asia, and internationally.

• The restructuring of the business portfolio, shifting focus to higher profitability in Energy, Functional Materials, and Optics & Systems as Analog Core business groups, is expected to enhance growth and improve net margins by concentrating investment on core profitable areas.
  
• The anticipated gradual recovery in semiconductor-related products in the late fourth quarter and robust growth in primary batteries for medical applications are expected to drive revenue growth in the Energy segment.
  
• Significant investments in new technologies, such as all-solid-state batteries, along with an expanded investment plan of ¥35 billion, are intended to fuel future revenue growth across mobility, ICT/AI, and human social infrastructure sectors.
  
• The focus on improving capital efficiency and optimizing shareholder returns, including a share buyback and increasing dividends, aims to improve the overall earnings per share and enhance shareholder value.
  
• The company's strategic plan, MEX26, with targets of achieving an 8% or more operating profit margin and 10% or more return on equity, is expected to improve financial performance, making it attractive for investors looking for long-term growth in earnings.

Maxell Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Maxell's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 6.1% in 3 years time.
• Analysts expect earnings to reach ¥9.6 billion (and earnings per share of ¥278.02) by about April 2029, up from ¥4.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ¥10.6 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.4x on those 2029 earnings, down from 16.5x today. This future PE is lower than the current PE for the JP Electronic industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Risks

• The company's net sales decreased by ¥2.5 billion year-on-year, mainly due to weak sales in rechargeable batteries, semiconductor-related products, and licensing revenues. This decline impacts overall revenue, indicating potential challenges in maintaining or growing sales.
  
• Operating profit declined by ¥0.4 billion year-on-year, affected by the prior year's one-time licensing revenue and decreased sales, reflecting potential pressure on net margins and earnings.
  
• The changes in the functional materials segment, with net sales being revised downward and operating profit declining due to underperforming products like industrial rubber, suggest ongoing struggles that could affect future profitability.
  
• The optics and systems segment experienced a significant decline in both net sales and operating profit, impacted by sluggish sales in in-car camera lens units and semiconductor-related products not meeting expectations, likely affecting revenue and net margins.
  
• Consumer lithium-ion battery sales have been sluggish, with future expectations of further decline, which could negatively impact the energy segment's revenue and potentially the company's overall earnings.

Valuation

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

• The analysts have a consensus price target of ¥2458.33 for Maxell 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 ¥3000.0, and the most bearish reporting a price target of just ¥1800.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ¥157.2 billion, earnings will come to ¥9.6 billion, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 7.5%.
• Given the current share price of ¥2143.0, the analyst price target of ¥2458.33 is 12.8% 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.