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Elevator Pitch
Nidec Corporation (OTCPK:NJDCY) [6594:JP] is awarded a Buy rating.
I wrote about NJDCY’s inorganic growth strategy in my November 26, 2023 initiation article. The focus of the current update is Nidec Corporation’s new CEO and its potential M&A deal.
My opinion is that Nidec Corporation has made the right decision to select Mitsuya Kishida as the new CEO to lead the turnaround of its Electric Vehicle or EV traction motor business. Separately, the potential acquisition of Innomotics sends a clear signal that NJDCY is actively exploring new M&A opportunities. I stick with a Buy rating for Nidec Corporation in view of these recent developments.
The company’s shares can be bought or sold on the OTC (Over-The-Counter) market and the Tokyo Stock Exchange. Nidec Corporation’s Japan-listed and OTC shares boasted average daily trading values of $80 million and $1.5 million, respectively for the last 10 trading days as per S&P Capital IQ data. Interactive Brokers is one of the US brokerages that allow their clients to trade in Japan-listed stocks like those of Nidec Corporation.
New CEO
Mitsuya Kishida has become the new CEO of Nidec Corporation since the beginning of this month. According to NJDCY’s announcement disclosing this change, Mitsuya Kishida served as the Executive General Manager at the company’s Automotive Motor & Electronic Control Business Unit before assuming the CEO position. Also, former CEO and founder Shigenobu Nagamori took on the role of Executive Chairman since April 1.
I have a favorable view of the new CEO appointment and the new role for the founder.
Firstly, Nidec Corporation needs someone to lead and oversee the turnaround of the company’s EV traction motor business, and it has chosen the right person.
NJDCY highlighted at its Q3 FY 2023 (YE March 31, 2024) earnings call in late-January that it is “currently revising our strategy” for its EV traction motor business to be “profit-oriented for the future.” This business suffered from an operating loss of -JPY6.1 billion in Q3 FY 2023 as indicated in Nidec Corporation’s quarterly earnings presentation slides.
Looking ahead, NJDCY has set a target of having the EV traction motor business deliver positive operating income by Q3 FY 2024. Specifically, Nidec Corporation’s turnaround plans for the EV traction motor outlined in its Q3 FY 2023 earnings presentation involve “limiting unprofitable orders, and localizing product development and procurement” for its operations in China.
In my opinion, Mitsuya Kishida is the right choice for the CEO position. One key factor is that he has experience working at Nidec Corporation’s Automotive Motor & Electronic Control Business Unit. Another factor is that he has been involved in other turnaround situations in the past. According to Nikkei Asia’s February 2024 news report, Mitsuya Kishida “was instrumental in bringing Sony’s (SONY) loss-making smartphone business into the black” in the late-2010s and early-2020s.
Secondly, the new CEO appointment should help to remove the overhang regarding succession issues at Nidec Corporation.
It is worthy of note that founder Shigenobu Nagamori had been NJDCY’s CEO for a long time, or more specifically for the July 1973-June 2021, and April 2022-May 2023 time periods. Mitsuya Kishida is roughly 15 years younger than Shigenobu Nagamori (79 years old), so the appointment of a younger CEO is a positive development in terms of leadership continuity.
Thirdly, the founder’s new role might have a positive impact on Nidec Corporation’s inorganic growth prospects.
In the company’s announcement revealing the new CEO appointment, it was also mentioned that Shigenobu Nagamori will “utilize his decades-long experience in the area of M&A” to help Nidec Corporation “continue to engage in corporate acquisition” as Executive Chairman. I think it is a good idea to have two executives assume separate responsibilities for organic growth (CEO Mitsuya Kishida) and inorganic growth (Executive Chairman Shigenobu Nagamori), so that NJDCY can leverage on multiple growth opportunities.
Potential M&A Deal
In the previous month, Bloomberg reported that Nidec Corporation is in the race to “acquire Siemens AG’s (OTCPK:SIEGY) (OTCPK:SMAWF) Innomotics large motors business.” As per this March 12, 2024 Bloomberg article, Innomotics is a producer of “heavy-duty electric motors used in ships and mining equipment.”
The potential acquisition of Innomotics in line with NJDCY’s corporate strategy. At the company’s most recent third quarter earnings briefing, Nidec Corporation emphasized that it is “planning to do a big M&A in the future” so as to return to “the core, the pillar of our business” in motors, as opposed to expanding in non-core areas like automotive.
In terms of the potential benefits of acquiring Innomotics, market intelligence firm Interact Analysis’ research suggests that this M&A transaction might help to grow Nidec Corporation’s motor sales contribution from the EMEA geographical region. As a reference, NJDCY derived approximately a quarter of its 9M FY 2023 revenue from Europe and other markets. Also, NJDCY’s market share in the EMEA motor market is under 10% as per Interact Analysis’ research, so it makes sense for the company to expand its presence in this geographical market.
Furthermore, I think that the market will be more willing to assign higher valuation multiples to Nidec Corporation, when NJDCY focuses on its core motors business again with this latest M&A deal. Even if this Innomotics acquisition falls through, Nidec Corporation is well-positioned to exploit other inorganic growth opportunities with Executive Chairman Shigenobu Nagamori leading its M&A efforts.
Look Past Fourth Quarter Operating Profit Contraction
It is expected that Nidec Corporation’s Q4 FY 2023 (January 1, 2024 to March 31, 2024) financial results will be released on April 23 this year.
The company has previously guided for a -80% QoQ drop in its operating income from JPY53,562 million in Q3 FY 2023 to JPY10,679 million (source: third quarter earnings presentation) for Q4 FY 2023.
I think that NJDCY’s actual fourth quarter operating profit will be largely in line with its guidance. This is because the key item affecting Nidec Corporation’s Q4 FY 2023 results is the estimated JPY45 billion (source: Q3 earnings call) restructuring charge it expects to incur in relation to its EV traction motor business.
My view is that investors should look past the potential fall in Q4 operating income and pay more attention to the positives associated with Nidec Corporation’s CEO appointment and the potential M&A deal.
Key Risk Factors
There are two downside risks for Nidec Corporation that investors should be concerned with.
One risk factor is that the company fails to execute well on the turnaround plans for its EV traction motor business under the leadership of the new CEO.
The other risk factor is that NJDCY overpays for the acquisition of Innomotics, which could offset the positives relating to this potential M&A transaction.
Concluding Thoughts
I have a favorable opinion of Nidec Corporation’s recent developments such as the new CEO appointment and the potential M&A transaction involving Innomotics as explained earlier.
In my late-2023 initiation article, I noted that NJDCY expected long-term revenue CAGR is about +20.6% based on its FY 2030 top line goal. In contrast, the market is now valuing Nidec Corporation at an undemanding low single digit consensus next twelve months’ Enterprise Value-to-Revenue multiple or 1.7 times to be exact. In other words, I deem Nidec Corporation’s valuations to be sufficiently attractive to justify a Buy rating.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
