First-quarter profit beat expectations, with AI server demand driving Rohm into an accelerated earnings recovery phase

Overview

Rohm's first-quarter operating profit reached ¥9.6bn, well above Goldman Sachs' forecast of ¥6.1bn, while the company kept its full-year operating profit guidance unchanged at ¥30bn. Goldman Sachs believes the first-quarter beat was mainly driven by improved profitability in silicon carbide, product price increases and structural reforms. Starting from the second quarter, if company-wide sales remain stable or increase sequentially, higher capacity utilization, price increases and reform effects should become more apparent in the second half, bringing significant operating leverage. Orders in the AI server business have already exceeded existing capacity, and silicon carbide products are also benefiting from related demand, so the company's earnings recovery may be faster than previously expected.

Core views

The core view is that Rohm is recovering from a cyclical trough and silicon carbide impairment pressure. High growth in AI and server-related sales provides a new utilization direction for idle silicon carbide capacity or capacity originally aimed at the EV market, making the path for the silicon carbide business to turn profitable clearer. At the same time, industry price increases, the company's structural reforms and a rebound in capacity utilization may create a compounding effect. Goldman Sachs expects a high probability of a full-year guidance raise at the half-year results and believes that improvements in Rohm's standalone business, potential business restructuring and the value of its Toshiba stake will jointly enhance its attributes as an AI-related asset.

Analysis framework

The report compares first-quarter actual results with Goldman Sachs' forecasts and the company's internal expectations, breaks down earnings drivers such as silicon carbide, AI servers, pricing and structural reforms, and quantifies the medium-term recovery through forecast revisions for FY3/27 to FY3/29. On valuation, it determines the 12-month target price based on FY3/29 forecasts, incorporating return on invested capital, cost of capital and debt-adjusted cash flow multiples, while also assessing the potential impact of integration arrangements related to Toshiba and Mitsubishi Electric.

Methodology notes

• Performance AnalysisExpectation Gap Analysis

  Comparing actual results, research institution forecasts and company expectations

  First-quarter operating profit of ¥9.6bn was about 57% above Goldman Sachs' forecast of ¥6.1bn and approximately twice the company's original expectation, constituting a clear positive earnings surprise.

• Earnings ForecastingOperating Leverage Analysis

  Revenue changes and fixed-cost absorption jointly amplify profit changes

  When sales are stable or increase sequentially, higher capacity utilization, price increases and structural reforms can improve fixed-cost absorption, causing profit growth to significantly outpace revenue growth; if sales risks materialize, this leverage may also work in reverse.

• Valuation methodsReturn on Invested Capital and Cost of Capital Valuation

  Measuring enterprise value based on forecast return on invested capital relative to cost of capital

  The target price is based on the relationship between enterprise value and total invested capital forecast for FY3/29 and cash return on investment relative to weighted average cost of capital, with reference to industry debt-adjusted cash flow multiples.

• Relative ValuationIndustry Multiple Premium Method

  Applying a premium to the industry average valuation multiple

  Goldman Sachs applies a 20% premium to the industry average enterprise value to debt-adjusted cash flow multiple of 10x; the target price corresponds to approximately 24x FY3/29 forecast P/E.

• M&A AnalysisM&A Probability Tiering

  Classifying companies into three tiers based on potential acquisition probability

  Rohm's M&A rank is 3, corresponding to a 0% to 15% probability of becoming an acquisition target; this rank is viewed as having no material impact on the target price, so no M&A premium is included in the valuation.

Asset mapping & comparison

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

• Rohm (6963.T)

  The core recommended stock in the report, benefiting from growth in AI servers, data centers and silicon carbide demand.

  Strengths

  First-quarter earnings exceeded expectations; AI server orders exceed capacity; silicon carbide sales and yields are improving; price increases and structural reforms bring operating leverage; the balance sheet is expected to remain in a net cash position.

  Weaknesses

  Previously affected by a slowdown in the global EV market and intensified competition in China, the silicon carbide business recorded a large impairment; earnings recovery still depends on sales, utilization and price execution.

  Comparison

  The target price valuation applies a 20% premium to the industry average 10x debt-adjusted cash flow multiple, and the target price corresponds to approximately 24x FY3/29 forecast P/E.

  Risks

  Further increases in precious metal prices, delays in business portfolio transformation, uncertainty over integration plans, fluctuations in the market value of the Toshiba stake, and AI server demand or capacity expansion falling short of expectations.

• Toshiba shares held by Rohm

  Viewed as an asset that may enhance Rohm's market value and attract investor attention.

  Strengths

  The value of the stake may provide additional asset value support for Rohm.

  Weaknesses

  Goldman Sachs has not formed an independent view on the specific value of this stake.

  Comparison

  The value of this stake, together with improvements in Rohm's standalone business and potential restructuring value, forms the logic for share re-rating.

  Risks

  Fluctuations in Toshiba's stock market valuation will change the contribution of this stake to Rohm's value.

Key data

• First-quarter operating profit¥9.6bnAbove Goldman Sachs' forecast of ¥6.1bn and approximately twice the company's original expectation.
• Full-year operating profit guidance¥30bnMaintained unchanged, with an exchange rate assumption of ¥153.53/USD.
• AI and server-related sales growth67% YoY growthFirst-quarter sales are estimated at approximately ¥6.5bn; the full-year plan is ¥25.0bn, while actual sales may exceed ¥30.0bn.
• Silicon carbide sales growth53% YoY growthFirst-quarter sales are estimated at over ¥10bn, with yield and profitability continuing to improve.
• FY3/27 operating profit forecast¥48.0bnPrevious forecast was ¥42.0bn, raised by 14%.
• FY3/28 operating profit forecast¥82.0bnPrevious forecast was ¥80.1bn, raised by 2%.
• FY3/29 operating profit forecast¥121.0bnPrevious forecast was ¥116.4bn, raised by 4%.
• FY3/29 operating margin forecast18.0%Above FY3/26's 2.3%, reflecting expectations for significant earnings recovery.
• 12-month target price¥6,600Slightly raised from ¥6,500; upside relative to the current share price of ¥4,734 is 39.4%.

Impact & implications

If AI server orders continue to exceed capacity, Rohm can shift part of its silicon carbide capacity originally aimed at the EV market toward faster-growing applications, thereby improving utilization and accelerating the silicon carbide business's turnaround to profitability. Price increases, yield improvement and structural reforms will further enhance profit leverage. A potential half-year guidance raise could become a near-term valuation catalyst, while business integration with Toshiba and Mitsubishi Electric, if advanced, could affect earnings and competitiveness from FY3/28 onward, though there remains uncertainty around approval timing and transaction structure.

Risks

• Further increases in precious metal prices, compressing product margins.
• Progress in business portfolio transformation and structural reforms falls short of expectations.
• Company-wide sales decline sequentially, causing capacity utilization and operating leverage to fall short of expectations.
• Growth in AI server demand or progress in capacity expansion falls short of expectations.
• The global EV market continues to slow, and competition in China's silicon carbide market intensifies.
• Uncertainty exists regarding restructuring, integration structure and antitrust approvals related to Toshiba and Mitsubishi Electric.
• The market value of the Toshiba shares held by Rohm fluctuates unfavorably.
• The execution effect of price increases or the extent of silicon carbide yield improvement falls short of expectations.

What to watch

• Whether full-year operating profit guidance is raised when half-year results are released.
• Sequential changes in company-wide sales and capacity utilization in the second quarter and second half.
• Whether full-year sales of AI and server-related businesses can exceed ¥30.0bn.
• Changes in AI server order backlog, capacity expansion progress and the supply-demand gap.
• Sales growth, yield improvement and timing of profitability for the silicon carbide business.
• Progress on further price increases amid material cost pass-through and tightening supply-demand conditions.
• Progress on due diligence, transaction agreements and antitrust approvals for integration with Toshiba's semiconductor business.
• Changes in plans for potential integration with Mitsubishi Electric's power semiconductor business.