Nifco: struggling to get back on track

by SR on July 20, 2012

Nifco share price vs Topix (x)

Speed bumps

On 20 July 2012, the Nikkei published an article suggesting that plastic auto parts supplier Nifco’s operating profit for the April to June 2012 quarter reached 2.5 billion yen, up an estimated 5% year-on-year, with sales hitting 33 billion yen (results should be announced late this month or early next month). In my experience these “previews” are usually accurate in the case of Nifco; it is likely a senior member of management is whispering to the Nikkei. If the increase is about 5% YoY that suggests something in the region of 2.45bn yen in OP. From my perspective, there are two interesting points: one (positive) is that operaing profit looks set to increase slightly over the previous quarter, the other (negative) is that neither sales nor profits are doing as well as they should be at other suppliers who are more geared to Toyota.

The truth is that Nifco has been struggling a little. In this post in March 2012, I ran through the basics on Nifco, a company I said should be on your radar screen if you like small-caps in the industrial space. I also implied that Nifco would beat guidance for the March 2012 fiscal year. The results were announced on 10 May 2012 and far from beating, Nifco was actually short of guidance. The culprit seems to have been costs associated with ramping new capacity and higher raw material costs. I was – and am – surprised that the impact is so large, as this hasn’t been the case in the past. A look at the chart below shows how disappointing that Q4 margin was.

Nifco operating profit margin by quarter (%)

Not the best choice for sales growth in FY3/13

Why aren’t sales picking up more? It seems to me likely that the highly diversified nature of the customer base is a short-term negative, in the sense that a company like Aisin Seiki derives more than 60% of its revenues from Toyota. With Toyota global production at or close to record highs, you want as much exposure to Toyota as possible in my view. Toyota is Nifco’s largest customer but that is only 20%, while capacity constrained Hyundai Motor is the second largest at 15-20%. That may explain the modest sales guidance of just +5.8% YoY for Nifco. Denso and Aisin Seiki are looking for growth in revenues of more than 8% YoY.

Nifco annual sales and operating profit (billion yen)

Nifco annual sales and operating profit (billion yen)

Over the long term, there is nothing here to worry about. The company is still well-managed, and is the leading player in a market (plastic fasteners) where there is a secular move away from steel plastic in order to save weight. I have the same problem that I always have with Nifco, which is that it is well-known by institutional investors and its virtues are widely appreciated. Accordingly it is difficult to buy at what feels like an attractive price.

Nifco quarterly sales, operating profit and OP margin

In the short term, the share price has taken a pounding, as shown by the chart at the top of this post. On 30 December 2011 Nifco’s share price was 2.95x that of the value of Topix, now it is 2.33x, a decline of 21% relative to the index.

Change in share price of Nifco and of Topix (%)

Previous post:

Next post: