Morningstar | Daikin's Record High 1Q Earnings within Expectation; Shares Overvalued. See Updated Analyst Note from 07 Aug 2018
No-moat Daikin reported record-high first-quarter fiscal 2019 (year ending March 2019) net profit of JPY 59.6 billion, up 17% year over year. Although this accounted for 32% of our full-year forecast, we view the results as in line, given that first-half net profits are seasonally stronger. We keep our earnings estimates largely unchanged but we increase our fair value estimate to JPY 9,600 per share from JPY 9,400 to take into account the time value of money. In our view, Daikin's shares remain overvalued, as we believe the solid earnings growth witnessed in the past is not sustainable. We forecast earnings CAGR of 3% in our explicit five-year forecast, compared with the historical three-year CAGR of 16%.In spite of rising raw material costs, Daikin's operating margin held up well at 12.7% in the first quarter, similar to the year-ago period. The robust margin was underpinned by strong results from all segments on the back of rising sales, especially the high-value-added products, implementation of cost-cutting measures and effective pricing strategy. In particular, the chemicals division benefited from strong market demand from the semiconductor and automobiles industries, with operating margin improved to 15.9% from 11%, a year ago.
There are no major surprises in Daikin's core air conditioning business, as revenue growth remained strong at 11% year over year, with higher sales achieved in all regions except the Middle East. We continue to see the Americas, Japan, and China to be the top three markets for Daikin. Both the Americas and Japan are seeing surging capital investments and buoyant personal spending while Daikin continues to expand its direct sales network in China and promote cost savings through in-house production and automation. That said, we think sales growth will eventually normalize in the longer term due to competition, especially in China, and the appreciation of Japanese yen.
Daikin Industries is engaged in the manufacture and sale of air conditioning and refrigerating equipment. The Air Conditioning and Refrigeration Equipment segment offers housing equipment including split type air conditioners, air purifiers and air to water heat pump systems; commercial equipment including packaged air conditioners, multi-split type air conditioners, water cooled chillers, medium/low temperature refrigeration equipment, air handling units, rooftop systems and air filters; and marine air conditioning equipment. The Chemicals segment offers fluorocarbon gases, fluoroplastics, fluoroelastomers, fluoro coating agents, semiconductor-etching products and fluorinated oils.
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