Expecting Denso’s Sales To Be Affected by Toyota’s Production Plan Cut; Lowering FVE but Undervalued

We lower our fair value estimate for Denso to JPY 9,100 from JPY 9,200, after revising our revenue/operating margin projections. Its largest customer, Toyota Motor, recently cut its production plan for its fiscal 2022 (ending March for Denso/Toyota) to 9.2 million units from 9.7 million, implying only about a 5% increase in the second half from last year and the first half. While this is due to supply-side risks like semiconductor procurement according to Toyota, we think the reduction was also due to lower demand expectations. Although we expect near-term headwinds, Denso’s shares trade below our fair value estimate and we maintain our outlook that that its midterm revenue target of JPY 7 trillion, or a 6.1% CAGR between 2021 and 2025, can be surpassed.