26 Jan A Fresh Look at NEC (TSE 6701)
NEC renews its focus on growth and efficiency gains
For several years now, management of NEC has taken steps to reduce its exposure to unprofitable businesses and reorient the company toward new markets. Reported sales have declined while, until this fiscal year, the sales of the current business and overall operating profit have increased. Year-on-year declines in sales and operating profit in the six months to Sep-16 were due a combination of project timing and weak demand in Japan and overseas, which overwhelmed efforts to cut costs. In order to get the company back on a growth track, management has launched a new medium-term plan that focuses on future-oriented businesses – cyber security, the Internet of Things (IoT), IT services for retailers, advanced telecom technology – and more efficient use of resources.
As a result of these efforts, plus the consolidation of Japan Aviation Electronics (JAE) and a more favorable operating environment, we expect sales to rise from ¥2,900 billion this fiscal year to ¥3,100 billion in FY Mar-19, operating profit to rise from ¥92 billion to ¥140 billion and net profit from ¥45 billion to ¥78 billion over the same period. The operating margin should rise from 3.2% to 4.5% and ROE from 5.8% to 9.2%.
At ¥318 (January xx closing price), NEC shares are selling at 18.4x our EPS estimate for this fiscal year, 13.3x for next year and 10.6x for the year to Mar-19. Projected EV/EBITDA multiples for the same three years are 8.3x, 6.9x and 6.0x. Projected price/book value multiples are 1.1x, 1.0x and 1.0x. These valuations are in the middle of their historical ranges. Since the company turned profitable in FY Mar-13, the P/E multiple has ranged from 8.3x to 26.9x. For reference, 15x our EPS estimate for FY Mar-19 is ¥450, indicating upside potential of 41.5%.
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