Fair Long-Term View Centers On SiC Power Devices And Automotive Expansion

Catalysts

About ROHM

ROHM is a semiconductor company focused on power and analog technologies across automotive, industrial and consumer markets.

What are the underlying business or industry changes driving this perspective?

• Rising adoption of electric and hybrid vehicles is supporting ROHM's focus on SiC power devices for xEV inverters, traction inverters and PHEVs. Management links this trend to a plan to reach JPY 175b plus in power device net sales and to improve the related operating margin.
• Growth in power electronics needs for energy applications and solar panels in regions such as Europe is supporting demand for SiC devices and TRCDRIVE packs. Management connects this to stronger sales in automotive and industrial end markets and to a path toward breakeven and profit in the SiC business by fiscal 2028.
• The shift from 6 inch to 8 inch SiC substrates and a higher in house epi production ratio is aimed at lowering manufacturing costs and raising yields. Management ties these initiatives to better SiC profitability and an improvement in overall operating margin and earnings.
• ROHM's midterm plan targets over JPY 500b in net sales, over 20% operating margin and over 9% ROE by 2028. The plan is supported by restructuring of loss making businesses, fixed cost reductions of JPY 32b and tighter CapEx, which is intended to lift net margins and return on equity.
• Expanding analog and IC offerings for automotive, AI servers and consumer devices, including Solist AI and LASCA chiplet technology, together with growth plans for optoelectronic sensing and AI server related power and main board products, is aimed at broadening the revenue base and lifting segment operating margins. This is particularly relevant in the IC business, which has a fiscal 2028 target of over JPY 215b net sales and over 23% operating margin.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on ROHM compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming ROHM's revenue will grow by 12.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -32.9% today to 17.4% in 3 years time.
• The bullish analysts expect earnings to reach ¥118.4 billion (and earnings per share of ¥313.44) by about July 2029, up from -¥158.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥59.9 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 36.5x on those 2029 earnings, up from -11.7x today. This future PE is greater than the current PE for the JP Semiconductor industry at 26.3x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• ROHM is leaning heavily on SiC power devices for automotive and energy applications, and management is targeting a move from breakeven in fiscal 2028 to meaningful profitability after shifting from 6 inch to 8 inch wafers and increasing in house epi production, so if SiC adoption or pricing is weaker than expected, or the 8 inch transition is slower or more costly, SiC related revenue and net margins could fall short.
• The company plans to shrink or discontinue loss making businesses and reorganize manufacturing sites while keeping 2028 net sales above ¥500b. This implies a period of top line pressure while fixed cost cuts and yield gains are still in progress. If the downsizing drags on or replacement growth in ICs, AI server related products and optoelectronics is slower than planned, overall revenue and earnings could be lower than management’s targets.
• Automotive is expected to reach a 55% sales mix by 2028 and SiC traction inverter orders are projected to roughly triple between fiscal 2025 and fiscal 2028, with around 3 million car equivalent inverters and 16 OEMs already in place. Any long term slowdown in xEV adoption, weaker orders from European and Japanese customers, or reduced demand from Chinese OEMs could weigh on power device revenue and operating margin.
• Management is counting on fixed cost reductions of ¥32b, lower depreciation and tighter CapEx of about ¥50b per year on average, as well as improved procurement and pricing, to lift operating profit to ¥100b and ROE to above 9% by 2028. If material cost pressures such as higher gold prices persist, pricing power is limited or efficiency programs underdeliver, net margins and earnings could remain subdued.
• The shift toward higher shareholder returns, including a dividend payout ratio above 30%, a total return ratio above 100% and roughly ¥200b earmarked for shareholder distributions over the plan period, is supported by over ¥300b of operating cash flow and asset sales. If cash generation weakens because of slower sales, inventory issues or weaker SiC profitability, ROHM may need to scale back buybacks or dividends, which could affect earnings per share and the market’s view of the stock.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for ROHM is ¥8300.0, which represents up to two standard deviations above the consensus price target of ¥5650.0. This valuation is based on what can be assumed as the expectations of ROHM's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥8300.0, and the most bearish reporting a price target of just ¥3500.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be ¥680.9 billion, earnings will come to ¥118.4 billion, and it would be trading on a PE ratio of 36.5x, assuming you use a discount rate of 10.5%.
• Given the current share price of ¥4785.0, the analyst price target of ¥8300.0 is 42.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.