Sharp May Cut Profit Forecast as Smartphone Demand Weaker

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Sharp Corp.’s expected first-quarter loss may deepen skepticism that smartphone display demand will fuel a recovery strong enough to meet its full-year profit target.

The supplier of LCD panels to Apple Inc. will probably post an operating loss of 19.4 billion yen ($157 million) on Friday for the three months ended June 30, according to the average of five analysts’ estimates compiled by Bloomberg. The shortfall will make it difficult for Sharp to reach its 80 billion yen profit goal for the year to March 2016, according to Barclays Plc, Citigroup Inc. and Nomura Holdings Inc.

A forecast cut would add to pressure for broader restructuring at Sharp, which has consistently missed earnings targets as it failed to anticipate the success of rival TV producers in South Korea and China and slower demand growth for larger flat-screen televisions. The company has cut its operating income target six times in the past five fiscal years and reported a 48 billion yen operating loss in the 12 months ended March against guidance for 50 billion yen profit.

“If they cut the annual forecast, the company will have to come up with new measures to meet its mid-term goal of improving finances,” said Yu Okazaki, an analyst at Nomura in Tokyo. “Their business portfolio will need further restructuring, and not just LCDs, but appliances, copiers and TV businesses could be up for sale.”

Takahashi Plan

Sharp, which had net losses totaling $13.3 billion in the last four financial years, announced a recovery plan in May, including cutting its workforce by 10 percent and selling preferred shares to banks. President Kozo Takahashi is also selling the company’s headquarters, quitting markets and cutting back its solar business, while demand growth slumps in its new mainstay smartphone displays.

The company’s shares slumped to a three-year low at the end of June, before gaining 10 percent so far this month. They gained 1.2 percent to 163 yen as of 10:38 a.m. in Tokyo trading Thursday, tracking a 1.1 percent advance for the Topix index.

Sharp has already reduced factory output of smartphone screens to deal with excess inventories left over from the previous quarter, according to Kazunori Ito, an analyst at Barclays in Tokyo. The company is facing falling demand in China and increased competition from rival manufacturers such as Samsung Electronics Co., he said.

‘Brutal’ Market

“Demand in this market is weakening, but competition is getting more and more brutal,” Ito said.

Ito estimates a 25 billion yen loss in the three-month period will lead to an annual profit cut to 50 billion yen. He recommends selling the shares. Nomura’s Okazaki says the quarterly loss may exceed 30 billion yen and has a neutral rating on the company.

Under the revamp plan, the company is shifting resources to Asia and Japan by quitting its TV businesses in Europe, Canada and Australia. Sharp said it expects to turn the remainder of the LCD TV business profitable in the second half of this fiscal year.

“The forecast revision may happen after the first-half earnings or following the year-end holiday season and the quarter ending December,” said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo. “There is no quick recovery for Sharp’s earnings in sight.”

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