TDK guidance essentially in line with expectations; target price raised and Buy maintained

Overview

This report is Goldman Sachs' earnings review on TDK (6762.T). TDK's FY3/26 operating profit exceeded both Goldman Sachs' and the company's previous expectations, and the company's FY3/27 guidance is essentially in line with Goldman Sachs' expectations after adjusting for FX and one-off costs. Goldman Sachs believes that strong market concerns over profitability in the rechargeable battery business have eased, while visibility has improved for growth in HDD-related products and AI ecosystem products, and therefore maintains its Buy rating while slightly raising the target price.

Core views

The core views include: first, FY3/26 operating profit was ¥272.4bn, better than Goldman Sachs' forecast of ¥269.0bn and the company's guidance of ¥265.0bn; second, the company's FY3/27 operating profit guidance is ¥295.0bn, and although it is below Goldman Sachs' previous forecast of ¥310.0bn, it includes one-off costs and uses different FX assumptions, so after adjustment it is essentially in line with expectations; third, in the rechargeable battery business, despite declining small-sized battery shipments, margins are expected to remain at the previous year's level supported by improved product mix, pass-through of material costs, and growth in medium-sized batteries; fourth, growth momentum in HDD-related products is strengthening, with strong growth guidance for heads, nearline HDDs, and suspensions; fifth, the AI ecosystem is viewed as an important driver of the medium-term plan from FY3/28 onward.

Analysis framework

The report compares the company's actual results, company guidance, Goldman Sachs' old forecasts, and new forecasts, and adjusts FY3/27-FY3/29 earnings and cash flow forecasts by incorporating business-segment operating momentum, FX assumptions, one-off costs, capex, and depreciation updates. For valuation, it uses a 12-month target price framework, referencing FY3/28E EV/GCI and CROCI/WACC, and applies a premium to the sector average EV/DACF multiple.

Methodology notes

• Valuation methodsEV/GCI vs. CROCI/WACC

  Target price methodology

  Goldman Sachs sets a 12-month target price for TDK of ¥3,000, based on the FY3/28E EV/GCI and CROCI/WACC framework, and applies a 10% premium to the sector average 8x EV/DACF multiple, implying about 24x FY3/27E P/E.

• factor_profileGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite percentiles

  Goldman Sachs' factor profile compares the stock with the market and industry peers, using sales, EBITDA, and EPS growth to measure growth; ROE, ROCE, and CROCI to measure financial returns; and P/E, P/B, dividend-related metrics, EV/EBITDA, EV/FCF, and EV/DACF to measure valuation multiples.

• corporate_eventM&A Rank

  M&A probability score

  TDK's M&A Rank is 3, indicating a low probability of being acquired; under the disclosure framework, this rating is typically not included in the target price.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TDK (6762.T)

  Research subject, a Japanese electronic components/semiconductor company

  Strengths

  More balanced business drivers, covering batteries, sensors, passive components, and magnetic applications; improved visibility for growth in HDD-related products; AI ecosystem may become a medium-term growth driver.

  Weaknesses

  FY3/27 company guidance is affected by FX assumptions and one-off costs; some consumer electronics demand remains under pressure, and low-end smartphone demand is declining.

  Comparison

  Goldman Sachs compares TDK with its coverage universe of Japanese electronic components/semiconductor companies and believes its valuation is attractive relative to its business drivers and battery business growth potential.

  Risks

  Declining smartphone production, rising input costs, and yen appreciation.

• Rechargeable battery business

  One of TDK's core businesses

  Strengths

  A higher mix of metal-can types, pass-through of material costs, and growth in medium-sized batteries help maintain margins.

  Weaknesses

  Small-sized battery shipments are expected to decline 7%, and low-end smartphone demand is expected to fall 25%-30%.

  Comparison

  Compared with prior market concerns, the report believes profit resilience is better.

  Risks

  Further weakening in smartphone demand or insufficient pass-through of material prices.

• HDD-related products

  An important source of growth for TDK's magnetic application business

  Strengths

  FY3/27 head shipment volume is expected to grow 40%, nearline HDD 50%, and suspension 22%.

  Weaknesses

  Growth depends on nearline demand and customer capex cycles.

  Comparison

  Company guidance is above the previous assumption of 30% growth in head shipment volume.

  Risks

  A slowdown in data center or storage demand could weaken growth momentum.

• AI ecosystem-related products

  One of the drivers of the medium-term plan from FY3/28 onward

  Strengths

  The company has high visibility on AI-related demand for HDD-related products, passive components, medium-sized batteries, and semiconductor production equipment.

  Weaknesses

  Some contributions are more reflected in the medium-term plan, and short-term earnings delivery still needs to be observed.

  Comparison

  The report believes HDD-related products have the highest AI ecosystem visibility, followed by passive components and medium-sized batteries.

  Risks

  The pace of AI infrastructure investment or related end-demand may come in below expectations.

Key data

• FY3/26 operating profit¥272.4bnAbove Goldman Sachs' forecast of ¥269.0bn and company guidance of ¥265.0bn.
• FY3/27 company operating profit guidance¥295.0bnIncludes ¥6.0bn in one-off costs, with an FX assumption of ¥150/USD.
• FY3/27 Goldman Sachs new operating profit forecast¥311.0bnPrevious forecast was ¥310.0bn, with an adjustment of less than 1%.
• Target price¥3,000Raised from ¥2,900, with Buy maintained.
• Reference share price¥2,682TDK share price reference disclosed in the report.
• Market capitalization¥5.1tr / $31.9bnDisclosed in the report's key data.
• Enterprise value¥4.7tr / $29.6bnDisclosed in the report's key data.
• FY3/27 small-sized battery shipment guidance-7%Includes market share gains, flat high-end smartphone demand, and a 25%-30% decline in low-end smartphone demand.
• FY3/27 medium-sized battery growth guidance+30% yoySupports resilience in sales and margins for the rechargeable battery business.
• FY3/27 HDD head shipment guidance+40%Above the previous +30% assumption; nearline HDD is expected to grow 50%.

Impact & implications

The report has a positive implication for TDK's share price: maintained rechargeable battery margins, accelerating growth in HDD-related products, and improving visibility in the AI ecosystem help ease prior market concerns over earnings. Since Goldman Sachs only made slight adjustments to earnings forecasts, the investment conclusion is driven more by a decline in risk premium, more balanced business drivers, and still-attractive valuation, rather than a large upward revision to near-term earnings.

Risks

• Declining smartphone production.
• Rising input costs.
• Yen appreciation.
• Weaker-than-expected low-end smartphone demand may drag on small-sized battery shipments.
• If HDD- and AI-ecosystem-related demand slows, medium-term growth momentum may be affected.

What to watch

• Whether FY3/27 rechargeable battery margins can remain at the previous year's level.
• The offsetting effect between declining small-sized battery shipments and growth in medium-sized batteries.
• Whether shipment growth in HDD heads, nearline HDDs, and suspensions reaches company guidance.
• Order intake and earnings contribution of AI ecosystem-related products in the medium-term plan from FY3/28 onward.
• FX movements, especially the yen against the U.S. dollar; the report notes that a ¥1/USD move affects operating profit by about ¥2.0bn.
• The impact of capex and depreciation updates on cash flow forecasts.