Denka: A Mix of Positives and Negatives

Research evidence excerpt

Denka: A Mix of Positives and Negatives

UpdateMEarnings forecasts: Our F3/27 OP estimates are 1Q ¥6.5bn (+182% YoY), 2Q ¥9bn (+21%

YoY), full year ¥33bn (+26% YoY; previous estimate ¥34.5bn). Guidance is ¥12bn for 1H

and ¥30bn for the full year, and we expect 1H OP to exceed guidance. By segment, we

think the Electronics & Innovative Products plan is conservative. Our OP estimate for this

segment is lower than our previous forecast as we now factor in short-term raw material

constraints in Singapore. Going by trends to date, we also expect Life Innovation to

undershoot our previous forecast. We forecast OP of ¥39bn in F3/28 (+18% YoY) and

¥44bn in F3/29 (+13% YoY), close to the levels in the management plan released in Feb. In

terms of extraordinary losses associated with the withdrawal from chloroprene rubber in

the US, we assume ¥14–15bn annually and expect most of this to be offset by

extraordinary gains and the booking of deferred tax assets. As a result, we expect the

dividend to remain at ¥100 for the next three years.

View on the share price: We think alumina for AI applications (high heat dissipation

performance) and low-dielectric resin SNECTON (reduces transmission loss) are promising

materials. But we think combined sales of the two products in F3/27 will be around ¥6bn,

and we think semiconductor encapsulant manufacturers and CCL manufacturers are likely

to benefit more from market expansion than Denka itself. We think key challenges for the

company are to pursue further price increases by establishing a de facto standard and to

expand downstream. Meanwhile, fine chemicals manufacturers that have recently

increased returns to shareholders have seen favorable share price performance. We will