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Morningstar | Kubota's 1Q Within Expectations, 2019 Guidance Intact; FVE Raised to JPY 1,700. See Updated Analyst Note from 10 May 2019

After making minor adjustments to our model to factor in the robust growth seen in the first quarter, we have increased our fair value estimate for Kubota to JPY 1,700 per share from JPY 1,670. Our narrow moat and stable moat trend ratings are intact. We think the shares are slightly undervalued at the current price as we expect earnings growth to sustain in the near term on the back of growing demand.

Kubota’s first-quarter EBIT was within our expectations and is on track to meet full-year guidance, increasing 20.5% year over year to JPY 53 billion from JPY 44 billion on the back of a 12% year-over-year increase in revenue to JPY 481 billion from JPY 429 billion. The strong performance was mainly driven by a higher EBIT contribution from its farm and industrial machinery division underpinned by sales growth in (1) Japan due to the introduction of new farm equipment and solid demand from the construction sector; (2) North America due to solid demand and restocking needs; and (3) Thailand due to stable prices of agricultural products. Revenue in Europe was rather flat year over year due to the appreciation of the yen despite increase in sales of machinery. In China, sales of combine harvesters, rice transplanters and construction equipment decreased. In the water and environment division, we continue to see the construction of the waste disposal and treatment facility in Futaba, Fukushima Prefecture, supporting domestic growth, although this was partly offset by the decline in overseas revenue from the Middle East.

Management kept its full-year 2019 guidance unchanged, expecting EBIT to increase 5.6% year over year to JPY 200 billion on the back of a 6.5% year-over-year increase in revenue to JPY 1.97 trillion. Meanwhile, net profit is guided to increase 4.6% year over year to JPY 145 billion. The increase in revenue is mainly driven by (1) an increase in revenue in the farm and industry machinery in North America and Asia excluding Japan; and (2) an increase in sales of its environmental-related products in Japan partly due to the construction of the waste disposal and treatment facility in Fukushima. Our EBIT forecast of JPY 209 billion and net profit forecast of JPY 150 billion for 2019 are slightly above guidance as we expect a reduction in sales incentives on the back of improving demand for Kubota's machinery, resulting in higher profitability. The dovish tone on future interest-rate hikes by the U.S. Federal Reserve would also help to keep Kubota’s financing costs and sales promotion expenses stable. In the long term, we continue to expect growth in its sales of agricultural and construction equipment along with improvements in cost control, resulting in an improvement in profitability.