Multi-layer ceramic capacitor (MLCC) supplier Yageo Corp (國巨) is expected to see further downward revisions for its earnings and share price, as an abrupt dip in demand has prolonged absorption of exceptionally excessive inventories in its supply chain, Morgan Stanley said in a report.
Original equipment manufacturers and electronics manufacturing service providers snatched up MLCCs in preparation for the holiday shopping season in the second half of this year, as a scarcity of supply jacked up prices over past six quarters, the investment bank said.
“Our channel checks suggest more inventory sitting at the distributors for six to seven months, worse than the market expectation of five to six months and the usual two to three months,” Morgan Stanley analysts led by Howard Kao (高燕禾) said in a report released last week.
However, market demand slumped unexpectedly in September as US-China trade tensions depressed demand for end products, uch as smartphones, PCs and other consumer electronics, the analysts said.
Outlook for end-product demand in emerging markets is also muddy due to continuous weakness in foreign-exchange rates, they said.
Long-term supply agreements secured by Yageo would not provide any protection for the MLCC supplier from such downside risks, the report said.
Sliding demand and excessive inventories would cause a quarterly decline of 15 percent in average selling price for Yageo’s MLCCs in the first quarter of next year and prices would drop another 10 percent in the second quarter, Morgan Stanley said.
“Consensus [earnings] estimates have come down in the past four months, yet we still [estimate] 28 percent below consensus for 2019,” the Morgan Stanley analysts said.
Yageo’s earnings would decline at an annual rate of 21.33 percent next year to NT$28.77 billion (US$932.06 million), compared with NT$36.57 billion this year, they said.
Earnings per share (EPS) might drop from NT$87.06 this year to NT$68.5 next year, they said.
“We are more conservative than the market on end-demand and see downside risk heading into 2019, especially for smartphones, PCs and other consumer electronics,” the Morgan Stanley analysts said, adding that the US-China trade tensions and currency headwinds are weighing on demand, particularly in emerging markets.
The US investment bank gave Yageo an “underweight” rating, with a 12-month target price of NT$260, which values the stock at about 5.1 times its EPS estimate.
Yageo shares closed 1.75 percent higher at NT$320 on Friday. They have plummeted 35 percent in the past three months, while the TAIEX has declined 10 percent over the same period.
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