NJDCY - Nidec Stock: A Buy On M&A Growth Potential

2023-11-26 20:22:45 ET

Summary

• Nidec Corporation's successful tender offer for Takisawa's shares will allow it to expand its market share in Japan's machine tool industry.
• M&A will be a key factor in supporting NJDCY's efforts to reach a revenue of JPY4 trillion in FY 2025.
• I rate Nidec Corporation as a Buy after assessing its inorganic growth prospects.

Elevator Pitch

I assign a Buy investment rating to Nidec Corporation ( NJDCY ) [6594:JP] shares. Nidec Corporation's inorganic growth prospects are excellent, as seen with the recent Takisawa deal and the company's medium- to long-term financial goals. I think that Nidec Corporation deserves a Buy rating, as its current valuations haven't completely factored in its M&A growth potential.

Readers should be aware that they can trade in Nidec Corporation's shares in Japan and on the Over-The-Counter or OTC market. The mean daily trading value of Nidec Corporation's OTC shares with the NJDCY ticker symbol in the past three months was approximately $3 million (source: S&P Capital IQ ). The three-month average daily trading value of the company's shares traded on the Tokyo Stock Exchange with the 6594:JP ticker symbol was relatively better at $130 million. Investors can rely on Interactive Brokers or other US stock brokers providing foreign markets trading services to buy or sell Nidec Corporation's Japan-listed shares.

Company Description

On its corporate website , Nidec Corporation refers to itself as "the world’s No. 1 comprehensive motor manufacturer."

The Japanese company was first established in July 1973 and its shares have been listed on the Tokyo Stock Exchange since September 1998. Nidec Corporation is geographically diversified with its home market Japan accounting for under a fifth of its revenue . NJDCY's sales mix in terms of product category is highlighted below.

Nidec Corporation's Fiscal 2022 Revenue Mix By Products

Note that NJDCY refers to FY 2022 as the financial period between April 1, 2022 and March 31, 2023.

Recent Acquisition Is In The Spotlight

On November 20, 2023, Nidec Corporation released an announcement disclosing that "86.14% of the voting rights in" Takisawa Machine Tool Co., Ltd. via a tender offer. NJDCY also revealed in the announcement that it intends to "advance and carry out squeeze-out procedures through consolidation of shares" in Takisawa to convert it to a "wholly owned subsidiary as soon as possible."

This recent M&A transaction executed by Nidec Corporation is significant for two key reasons.

The first reason is that Nidec Corporation is well-positioned to gain further market share in the Japanese machine tool industry with its inorganic growth initiatives.

Nidec Corporation's Major M&A Deals In Recent Years

As per the table presented above, NJDCY bought over two other machine tool businesses, Mitsubishi Heavy Industries Machine Tool and OKK, in 2021 and 2022, respectively.

As indicated in the company's 1H FY 2023 earnings presentation slides , Nidec Corporation aims to increase its machine tool sales from JPY170 billion in FY 2022 to JPY500 trillion and JPY1 trillion by FY 2025 and FY 2030, respectively. NJDCY's third Japanese machine tool company acquisition in the past few years sends a clear signal that the company plans to continue with acquisitions in this industry. M&A deals like the takeover of Takisawa will help Nidec Corporation grab market share and expand its product portfolio in the machine tool space.

The second reason is that Nidec Corporation's recent acquisition of Takisawa is an "unsolicited bid" as highlighted in an earlier July 24, 2023 Reuters news article .

In this late July Reuters piece, NJDCY's founder and CEO Shigenobu Nagamori was quoted as saying in a media presentation a few months ago that Nidec Corporation "will have a better chance of buying a bigger company in a shorter period of time", as Japan's corporates and regulators become more willing to accept "unsolicited" M&A deals such as Takisawa.

In Japan, negotiated deals have historically been the norm in the corporate world due to cultural norms in the country. Shigenobu Nagamori acknowledged in the July 2023 media presentation (source: July 24 Reuters article) that company had previously focused on acquisitions involving loss-making businesses that had a lack of suitors.

As such, the latest Takisawa deal represents a meaningful breakthrough for NJDCY, as Nidec Corporation has successfully acquired a company that didn't have interest in being bought over. In other words, Nidec Corporation's potential M&A pipeline has expanded substantially, as the chances of the company completing other "unsolicited" M&A transactions in the future have increased.

M&A Holds The Key To Achieving Mid- To Long-Term Financial Targets

Nidec Corporation's trailing twelve months' revenue (up to end-1H FY 2023) was JPY2.27 trillion as per S&P Capital IQ data, and the company's goal is to achieve a top line of JPY10 trillion in fiscal 2030. The intermediate-term target is for NJDCY to earn JPY4 trillion of revenue for FY 2025.

Nidec Corporation's Products Are Leveraged To Secular Growth Trends

In the chart presented above, I highlight that NJDCY's products are the beneficiaries of various growth trends such as "decarbonization" and "5G". Excluding the effects of M&A, Nidec Corporation sees its top line growing from JPY2.24 trillion for FY 2022 to JPY3 trillion in FY 2025 based on organic growth initiatives alone. This implies an organic revenue CAGR of +10.2%, which seems fairly reasonable taking into account the multiple secular growth drivers for the company.

Nidec Corporation still needs an additional JPY1 trillion sales contribution from M&As in the next couple of years to meet its overall JPY4 trillion revenue goal for FY 2025.

In the preceding section, I wrote about how NJDCY is acting as a consolidator in the Japanese machine tool market with its acquisition of three companies in the last few years.

Another area where M&A can be a growth accelerator for Nidec Corporation is in the industrial motor segment. According to disclosures in the company's 1H FY 2023 results presentation, NJDCY currently boasts a 10% share of the JPY2.5 trillion worldwide industrial motor market, which translates into sales of around JPY250 billion. Looking ahead, Nidec Corporation is expecting the size of the global industrial motor market to expand to JPY5 trillion by FY 2023, with the company's market share rising to 55%, implying future revenue of JPY2.75 trillion.

Nidec Corporation emphasized at its most recent Q2 FY 2023 earnings call (event transcript sourced from S&P Capital IQ ) that "we will leverage M&A" so that "this (industrial motor division) will become a very large and stable business for" the company. This means that M&A will play a critical role in the expected incremental revenue contribution of JPY2.5 trillion (JPY2.75 trillion minus JPY250 billion) from the industrial motor business between FY 2023 and FY 2030.

Closing Thoughts

Nidec Corporation currently trades at 1.60 times (source: S&P Capital IQ ) consensus forward next twelve months' Enterprise Value-to-Revenue. As a comparison, Nidec Corporation's 15-year mean Enterprise Value-to-Revenue multiple is higher at 2.26 times, and the implied top line CAGR as per NJDCY's FY 2030 revenue target is an impressive +20.6%. In my view, the market hasn't given sufficient credit to Nidec Corporation's long-term growth potential, especially relating to M&A, and this makes NJDCY a Buy.

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