MRAAY - Murata Manufacturing: Gearing Up For A Demand Ramp-Up

2023-03-22 05:59:54 ET

Summary

• Murata Manufacturing has formed a new JV to secure its production capacity.
• With demand from the auto industry ramping up, the expanded capacity is a positive step.
• The stock has declined on near-term demand/supply concerns, though the current valuation seems unjustified given the long-term tailwinds.

Japan-based Murata Manufacturing ( MRAAY ) (MRAAF), a leading manufacturer of multilayer ceramic capacitors (MLCCs) and radio-frequency modules, has announced an exciting new three-way joint venture agreement with chemicals company Ishihara Sangyo and its wholly owned subsidiary Fuji Titanium Industry. The JV will be crucial for expanding its barium titanate production capacity, in turn allowing the company to build up a more significant presence in power semiconductors ahead of mid to long-term demand growth across a range of end-markets. In the near term, Murata will need to navigate smartphone demand plateauing, however, as the market continues to mature and the demand/supply remains imbalanced. But as Tesla's ( TSLA ) latest investor day showed, EV/AV-driven MLCC demand growth, given the higher MLCC density in EV and autonomous applications, could lead to demand/supply tightening sooner than anticipated. Thus, investors with a long-term horizon would do well to look past Murata's recent below-par guidance update, particularly with the fwd P/E down to a cycle-low mid to high-teens P/E and with capital returns also limiting the downside risk.

Three-Way JV to Capitalize on the Growth of Power Semiconductors

Building on last year's MOU announcement, Murata has finalized the formation of a new JV with Ishihara Sangyo and its subsidiary Fuji Titanium Industry. Per the deal terms, the barium titanate production assets at Fuji Titanium Industry will be spun off into a separate company in which Fuji Titanium Industry, Murata, and Ishihara Sangyo will take 55%, 35%, and 10% stakes, respectively. As Fuji Titanium Industry and Ishihara Sangyo already operate within the Murata supply chain, supplying barium titanate and titanium dioxide (a key input in barium titanate production) to Murata for MLCC production, the JV is largely an extension of the current operating relationship.

Establishing the JV makes strategic sense, in my view, as it allows Murata to cycle-proof its access to stable barium titanate production capacity (via a new Nobeoka-based production site) ahead of a multi-year MLCC demand cycle. The company also gains valuable IP in regard to the liquid phase sintering process, which affords the thermal advantages necessary to tap into the growth of power-efficient semiconductors (e.g., silicon carbide and gallium nitride) across a range of end markets. Demand-side diversification is key - growth from the maturing smartphone market has slowed in recent years, so having the capacity and capabilities to serve a broader range of end markets should allow Murata to sustain overall growth at its MLCC business. Over the long run, the projected performance gains from the JV should also help Murata's move toward the higher end of the market, allowing for MLCC margin expansion over time.

Tesla Investor Day Reinforces the Growth Opportunity

TSLA's latest investor day highlighted the industry's need for semiconductors - equipping its vehicle fleet with the latest self-driving technology will entail 4x the semiconductor content of the average auto vehicle. In tandem, the legacy 12V batteries are also set to be replaced by 48V batteries as the power source for low-voltage circuitry in the upcoming product line-up (think Cybertruck and beyond) to increase power efficiency. The long-term benefit for industry leaders like Murata is clear - the increased production burden for MLCCs in EV/AVs in the coming years should more than offset any weakness in smartphone MLCC demand, given the significantly greater size and density (i.e., the number of pieces used). Plus, the event also reinforced the accelerating shift to higher voltages, particularly in the storage battery component, as a major driver in demand for power electronics over the mid to long term.

For Murata, further shifts by competitors to high-value-added MLCCs, particularly for MLCCs with larger sizes and better power management characteristics, should drive margin expansion over time. On the IP side, Murata's leadership in key tech innovations, such as high-reliability products for engine control units (ECUs), stands out in an increasingly energy-efficient future for autos. Alongside its supply capacity for MLCCs (enhanced by the latest JV), the company is in a great position to capitalize on the secular demand shift in automobiles.

Gearing Up for a Demand Ramp Up

Murata's latest JV will be well-received by investors following a poor quarter headlined by a disappointing guidance revision. The auto end market, in particular, will be one to watch - this year's TSLA investor day, for instance, highlighted the prospect of an auto-driven rise in MLCC demand over the coming years. Not only are power-efficient semiconductors becoming an increasingly important part of the EV/AV future, but these applications will also entail significantly increased MLCC density. Barring a deep global recession, expect the demand/supply balance to tighten again later this year as demand from automotive applications ramps up. With the stock down to a cycle-low fwd P/E despite Murata remaining well-positioned to capitalize on the secular MLCC tailwinds, the risk/reward seems favorable here.

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