EUR 850.00 For Business Accounts Only

Morningstar | No Major Surprise in Daikin’s Robust First-Half Fiscal 2019 Earnings; Shares Remain Overvalued

No-moat Daikin’s first-half fiscal 2019 (year ending March 2019) net profit of JPY 112.8 billion, up 11% year over year, was within our expectations. Although first-half earnings accounted for 60% of our full-year estimate, we leave our forecasts largely unchanged, given that this was in line with historical trend. We maintain our fair value estimate of JPY 9,600 per share, and we think Daikin’s shares remain overvalued, as we expect the firm’s earnings momentum to subside going forward. We project earnings CAGR of 3% in our explicit five-year forecast, compared with the historical three-year CAGR of 16%.

In view of the rising raw material costs environment, Daikin has been managing its business well by raising selling prices, expanding high-value-added product offerings, strengthening its salesforce, and implementing cost-cutting measures. Nonetheless, we have seen margin pressures emerging, with the firm’s second-quarter fiscal 2019 operating margin declining to 12.1% from 12.7% in the previous quarter and during the same period last year, respectively. Although the chemicals division’s operating margin continued to improve on the back of strong demand in the semiconductor and automobiles sectors, this is not sufficient to mitigate the margin slowdown from the air-conditioning business given its smaller scale (about 11% of total operating profit).

Meanwhile, we continue to see sales expansion in Daikin’s core air-conditioning segment, with revenue growing 10% year over year in first-half fiscal 2019. In particular, the Americas (rising capital investment due to tax cuts and resilient personal spending), Japan (strong residential sales benefiting from tailwind of a heat wave and increasing commercial demand), and China (weakening real estate investments mitigated by expansion of sales network, new product launches, and cost reductions through automation) remain the top three markets for Daikin.

That said, management warns that the business environment is challenging going forward due to impact of the China-U.S. trade war, slowing economic growth in China, and depreciation of emerging countries’ currencies. This is in line with our view that Daikin’s sales growth will eventually normalize in the longer term due to competition, especially in China.