Nidec's ROIC improvement key to re-rating

Nidec Corporation aims to raise its Return On Invested Capital (ROIC) by 4.8 percentage points to 12.0% within FY24. This improvement is seen as a key re-rating trigger by finance expert Andrii Dodonov, who remains positive on the company despite concerns about the global automotive and industrial sectors.

Nidec Corporation (OTCPK:NNDNF) has set an ambitious goal to raise its Return On Invested Capital (ROIC) by 4.8 percentage points to 12.0% within FY24. This significant improvement is seen as a key re-rating trigger by finance expert Andrii Dodonov, who remains positive on the company despite concerns about the global automotive and industrial sectors.

Dodonov highlights that Nidec's ROIC enhancement is achievable through various cost management strategies. The company aims to improve its Operating Profit (OP) to revenue ratio from 9.2% to 12.1% by FY27. This can be achieved by reducing organizational bloat and shutting down underperforming factories. Nidec plans to shut down at least 40 factories, representing one-seventh of its total manufacturing bases, as part of its initial footprint changes. Additionally, the company is committed to discontinuing unprofitable businesses, which could lead to expense savings of ¥0.15 trillion in FY2025-2027.

The effective management of Invested Capital (IC) is another key driver of ROIC upside. Nidec's Small Precision Motors (SPM) unit, with a revenue-to-IC ratio above 1.5x, is a crown jewel. Meanwhile, the Automotive Products (AP) segment has the weakest profitability and most unfavorable capital intensity. Dodonov suggests that Nidec might exit or monetize certain sub-segments in the AP division to boost future ROIC.

Nidec has been cash-generative, with operating cash flow (OCF) in the JPY 350-400B range for each of the past two fiscal years. The company is guiding for FY2027 OCF to be a superior ¥0.5T, with WC improvement being a critical driver. The increased CFs will be used to balance shareholder distributions and capital investments. Nidec plans to set aside as much as JPY 0.25 trillion of OCF for organic/inorganic growth initiatives each year.

However, there are risks associated with Nidec's profitability improvement plans. These include potential execution failures, underperformance in sales-to-IC ratio, and retention of underperforming businesses. Despite these risks, Dodonov continues to rate Nidec as a Buy, with ROIC enhancement as the catalyst. The company's fair EV/NOPLAT or EV/EBIT is 16.3x, based on a 12% ROIC target, a 7.6% WACC, and a 3% growth rate. This valuation is +41% higher than the current consensus one-year forward EBIT multiple of 11.6 times.

References:
[1] https://seekingalpha.com/article/4795163-nidec-roic-improvement-key-rerating-trigger
[2] https://economictimes.indiatimes.com/news/company/corporate-trends/nidec-expands-india-footprint-with-launch-of-orchard-hub-manufacturing-campus-in-hubli-karnataka/articleshow/121773700.cms