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Morningstar | Cutting Casio’s FVE to JPY 1,600, but We Like Its Organizational Reforms

After meeting with the company, we have trimmed Casio Computer’s fair value estimate to JPY 1,600 from JPY 1,800 because we expect higher new product-related expenses to impede profit growth. The focus on new business development reflects Casio’s stagnant revenue. While its operating margin has improved to 10% in fiscal 2019, from 3% in fiscal 2012, this came from the divestment of unprofitable businesses, such as digital cameras and system equipment rather than from growth. While we are pleased about Casio’s recognition of the need to build new product lines, the proportion of revenue from watches has increased to 57%, from 30%, and the company has not succeeded in establishing another revenue driver. We therefore understand Casio’s increased focus on introducing new products to pursue revenue growth, but we are skeptical the company can achieve its midterm plan to increase revenue by more than 20% over the next three years. This is one reason for our lower fair value estimate. Meanwhile, we will retain our view that Casio’s dividend yield of 3.6% should be attractive for investors. The market is overlooking the value of Casio’s rich cash flow, underpinned by its mainstay of watches and calculators.

While we consider Casio’s revenue growth guidance for fiscal 2020 and its mid-term plan for fiscal 2022 to be too optimistic, we acknowledge the company is making steady progress with its plans, led by current president Kazuhiro Kashio, to change its organization and management structure. We doubt there had been much redundancy and overlaps in Casio’s resources, as each business was product-siloed and independent of the other. Kashio has made progress by optimizing internal resources and introducing discipline and responsibility to the organization. This should help Casio adapt to the changing environment over the long term, in our view.