Morningstar | Progress on the Reform Plan Is Necessary to Add Value to Casio’s Share; Shares Fairly Valued
Casio Computer’s September quarter results were fairly in line with our forecasts. Excluding the impact of the exit from digital camera, its organic revenue dropped 2.7% from the previous year as system equipment and music instruments were weaker than expected. Meanwhile, we are satisfied with the solid demand for Casio’s mainstay watches and calculators, which are the sources of Casio’s rich cash flow. We are not surprised that Casio cut its full-year revenue guidance by 6%, as we had indicated on previous notes that Casio’s revenue guidance looks too optimistic, but we believe the company can achieve its operating income guidance of JPY 35 billion. While we consider it will take more time for Casio to establish another business pillar, we believe its downside on the share price is limited, as the current dividend yield of 3% should be attractive for investors. Therefore, we retain our fair value estimate of JPY 1,800 and our no-moat rating.At the earnings briefing, president Kashio talked about the progress of company’s reform plan that intends to improve cost efficiency, to optimize the organization, and to generate and pursue growth on new products, such as wearable devices and 2.5D printers. We acknowledge that Kashio had identified the problem of the company quite quickly after becoming president in 2015; there are operational overlaps and losses as an entire company, as each of the product domains are managed and optimized separately, and thus the company is relatively less flexible to adapt to the industry dynamics. However, in our view, while the company succeeded in divesting unprofitable businesses, it had been reluctant to make drastic changes over the past three years. Kashio aims to accelerate the reform and build a solid fundamental this year to accomplish sustainable growth in the midterm. This may eventually lift our fair value estimate, as our numbers are based only on the solid cash flow earned from watches and calculators at the moment.
Casio Computer is mainly engaged in the development, manufacture and sale of consumer electronics. Along with its affiliates, Co. operates in three business segments. The Consumer segment is engaged in the manufacture and sale of watches, clocks, electronic dictionaries, electronic calculators, label printers, electronic musical instruments and digital cameras. Co.'s watch brands include "G-SHOCK," "BABY-G," "PRO TREK," "EDIFICE," "OCEANUS, " "SHEEN," "PHYS," "wave ceptor" and "LINEAGE." The System equipment segment provides handy terminals, electronic cash registers including POSs, office computers, page printers and data projectors. The Other segment manufactures molds and other products.
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