Nitto, founded in 1918 in Tokyo, Japan, is primarily engaged in the Industrial Tape, Optonics, Human Life, and Others businesses. The Optonics business contributed 50% of the sales in FY23, followed by the Industrial Tape business at 37% and the Human Life business at 13%. The Group, with 27,426 employees, has a global reach with a presence across Japan, the Americas, EMEA, East Asia, and Southeast Asia and Oceania.

HDD demand to drive Optronics business

The company’s products witnessed strong traction in demand in 1HFY24 driven by higher-than-expected demand for high-capacity Hard Disk Drives (HDDs), which find application in data centers, and are also used in the production of tablets. In addition, the Optronics business – the cash cow of the Group – offers rich revenue opportunities in the product segment of Information fine materials, driven by a wide range of optical products used for displays, such as polarizing films and protection films for OLEDs. Circuit materials products also exhibit a strong market presence, driven by key offerings including CISFLEXTM (leader in the HDD market), flexible printed circuit boards, and high precision circuits for smartphones.

Going forward, the Group expects the market for HDD to thrive and demonstrate sustained growth from around 40mn units of shipment in 2023 to around 60mn units in 2027. Consequently, Nitto would look to strengthen its market position and make considerable capex investments to secure the required production capacity. Accordingly, the company has incurred a capex of JPY46.7bn in 1HFY24, and forecasts to make total investments of JPY110bn in FY24 (year ending March 2025). Nitto has kept its full-year FY24 forecasts unchanged and anticipates revenue of JPY982bn, operating profit of JPY180bn, and net income of JPY130bn.

Performance boosted by product demand

The company delivered decent performance over the period FY19-23, growing its revenue at a CAGR of 5.4% to JPY915bn. In addition, operating income grew at an impressive CAGR of 19.4% to JPY136bn during the same period, supported by a significant margin expansion of over 500 basis points (bps) to 14.9%. On the other hand, Nitto’s peer, FUJIFILM Holdings Corporation, delivered a better revenue CAGR performance of 6.3% over the same period to reach JPY2,961bn. However, operating income increased at a comparatively lower CAGR of 10.3% to JPY277bn, with an expansion of 127 bps in margins to 9.4%.

The company delivered decent performance during 1HFY24, demonstrated by record high revenue and operating profit performance. Nitto grew its revenue by 16.1% YoY to JPY521.7bn, led by the Optronics business, which increased by a robust 24.6% YoY to JPY287bn. The segment growth was driven by solid demand for optical films and transparent conductive films (ITO), owing to the sustained production of tablets. Moreover, the strong production of Chinese high-end smartphones led to the demand for Optical Clear Adhesive (OCA) and process protective materials. The Industrial Tape business increased 7.6% to JPY178.7bn, led by demand for assembly materials used in high-end smartphones. Tracking positive top-line performance, the operating profit registered a substantial increase of 69.5% YoY to JPY109.3bn owing to an improvement in product mix and positive impact of foreign exchange. Net income performance fared even better, increasing 80.9% YoY to JPY80bn. Consequently, the free cash flow of Nitto increased by JPY20.9bn to JPY39.2bn in 1HFY24, bolstering the cash reserves to JPY340.3bn as of September 30, 2024.

Nitto has been paying out dividends consistently across the past decade, increasing it at a CAGR of 9% to JPY260 per share over the period FY14-23. The company has paid a dividend of JPY140 per share in 1HFY24, and forecasts to pay a total dividend of JPY280 for the fiscal year 2024. The management plans to maintain the long-term dividend-on-equity (DOE) ratio at 4% or higher, emphasizing the payout of dividends on capital rather than profits. The company also prioritizes returning shareholder wealth through buybacks and has accordingly acquired JPY30bn worth of treasury shares from February to May 2024.

Positive analysts’ view backed by valuations

Nitto is trading at comparatively favourable valuation levels compared to peers. The company’s P/E ratio stood at 14.4x based on FY24 estimated EPS of JPY184, compared to the global peer average P/E of 23.8x. Additionally, its peer FUJIFILM is trading at a P/E ratio of 15.8x. Valuation through the EV/EBITDA approach also yields a lower multiple of 6.2x, compared to the global peer average of 17.4x, and 9.2x for FUJIFILM. A total of 11 analysts have covered the stock with 4 of them suggesting a 'Buy' rating and 1 having an 'Outperform' rating for an average target price of JPY2,781, indicating a limited upside potential of 4.2% from the current levels. As already discussed, the strong surge in prices post the release of H1FY24 results means the target price is close by, and any meaningful corrections in the near term should provide an opportunity for investors to evaluate the stock.

Overall, the company appears to be favourably placed to leverage the growing demand for its products and is well supported by positive fundamentals, favourable valuations, and an encouraging outlook. In addition, the management’s focus on returning sustainable wealth to its shareholders should attract long-term investors. However, owing to its diverse geographic presence, the company is exposed to overseas transactions and foreign exchange risks. Moreover, a change in market conditions or product and tech obsolescence can lead to volatile demand for Nitto’s products, resulting in topline instability. Nevertheless, the positives appear to outweigh the risks, putting the company in a favourable position to reap the advantages of market demand through capacity augmentation.