Denso earnings results and guidance: signalling strength

by SR on April 27, 2012

Beats FY3/12 guidance; bullish FY3/13 revenue forecasts

Denso quarterly sales and operating profit

    • Conclusion: signalling strength. It’s unusual for the sober-minded chaps at Denso to issue a bullish forecast, but that’s what they just did. Not profit – as we explain below, they’re definitely low-balling at the OP level – but in terms of sales, the surprisingly upbeat guidance indicates that Toyota’s production is coming through strong as it claws its way back onto something like equal terms with overseas competitors after a terrible year in 2011. Denso will be a prime beneficiary of that surge in output along with many other Japan auto parts stocks.
    • Results for FY3/12: strong performance. Denso posted revenue of Y3,154.6bn (+0.7% YoY) and operating profit of Y160.7bn (-14.7% YoY) compared to previous guidance of Y3,110bn and Y135bn in sales and OP respectively. So, a decent beat. In a previous post I suggest that Y155bn would be achievable for the year just ended and that turned out to be about right. However, revenues were ahead of what I expected. All in all a positive performance in a very challenging year dominated by the after-effects of two natural disasters: the Tohoku earthquake in March 2011 and the floods in Thailand in September and October 2011.

Denso annual sales and operating profit

    • What happened in Q4. In the fourth quarter of the March 2012 financial year revenue rose 21.6% YoY to Y940.2bn and increased sequentially from the previous quarter by 16.8%. We had expected a robust showing due to Toyota’s efforts to ramp up production – as we have noted many times, parts suppliers benefit first – but this surpassed our estimates. Not surprisingly operating profit also rose, by 56.5% quarter-on-quarter. Compared to the last quarter of the previous year OP rose by 465.8% but that is hardly meaningful given that the entire Japan auto parts supply chain was was hit by the earthquake in Q4 FY3/11. Note that Denso’s operating margin improved to 8.4%, which is not a record, or close to pre-GFC levels, but is a solid figure and the best since the April – June quarter of 2010 as the chart below shows.

Denso operating profit margins by quarter

  • Outlook for FY3/13: surprisingly strong revenue guidance. In this post on pricing I commented that sales of Y3,421bn in FY3/13 (+8.4% YoY) should be achievable but at the same time remarked that would be unlikely for Denso management to start the year with guidance that aggressive. In fact that is exactly what they did, as the annual sales and OP chart illustrates above (forecasts are on the righmost side and shaded blue). Given that Denso’s management is usually and deliberately conservative when it comes to guidance, this implies that the company believes there is upside to this guidance. I would argue that the OP guidance of Y205bn (+27.5% YoY) is far too low.
  • Why profit guidance is absurdly low. First, consider that close to Y30bn in costs related to the quake and Thailand will drop out of the P&L in FY3/12. That pushes up the Y160.7bn in OP posted in FY3/12 to, let’s say, Y185bn. Now consider operating leverage: revenue is increasing by Y265bn and OP is only increasing by Y44bn, but actually it’s more like Y20bn in organic terms, because OP in March 2012 should have been Y185bn without those one-off costs related to the disasters. So, with a neutral to positive yen, no more than a small increase in depreciation and a thumping great increase in sales, OP increases by only Y20bn? Absurd. Assume 30% incremental margins – remember costs have been cut very aggressively – and the firm should get close to Y80bn in volume benefits, plus the positive impact of costs falling out of the P&L (Y25bn) generating Y110bn above the Y160.7bn of FY3/12. Suddenly Y265bn looks quite achievable doesn’t it?

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