EUR 850.00 For Business Accounts Only

Morningstar | Kubota’s 2Q18 Results Below Expectations; FY Guidance Cut on Higher Costs; FVE Lowered to JPY 1,900

Kubota’s second-quarter 2018 earnings were below expectations, with EBIT declining by 4.4% year over year to JPY 57.2 billion on the back of an 8.0% year-over-year increase on revenue to JPY 477.6 billion, based on the restated accounts on the newly adopted IFRS standards. The weaker second-quarter 2018 performance was mainly driven by lower EBIT margins in all of its divisions, owing to higher costs and increased sales promotion expenses. Sales for its farm equipment, agricultural-related products, and construction machinery increased in Japan and North America. In Europe, sales for construction machinery increased significantly. Sales of farm equipment in Thailand and Myanmar increased due to improvement in demand on the back of rising rice and cassava prices, while sales of tractors increased in India due to the introduction of new multipurpose tractors. On the flip side, sales of farm equipment in China decreased significantly due to a delay in the announcement of the government subsidy and stagnation of rice prices. The firm announced a dividend of JPY 16 per share (increased from JPY 15 per share in first-half 2017). We have lowered our fair value estimate for Kubota to JPY 1,900 from JPY 2,100 on weaker-than-expected second-quarter 2018 results and headwinds from higher cost. Our narrow moat and stable moat trend ratings are intact. Nonetheless, we still think shares are undervalued at the current price, as we expect earnings growth to continue on the back of growing demand.

Management lowered its full-year 2018 guidance. Although revenue guidance of JPY 1.82 trillion was unchanged, management reduced EBIT guidance to JPY 204 billion (from JPY 213 billion previously), mainly due to an increase in raw material prices and sales promotion expenses. The increase in raw material prices could be due to the recent trade war between the U.S. and China, resulting in an increase in raw material costs, especially in the U.S. Rising interest rates in the U.S. also increase financing costs for Kubota, resulting in an increase in sales promotion expenses. This implies an EBIT margin of 11.2%, a slight decrease from the 11.4% in 2017. We have lowered our estimates and now expect the company to achieve EBIT amounting to JPY 201 billion in 2018, slightly below its guidance on concerns of headwinds from the higher costs and rising interest rates in the U.S. However, in the long term, we still anticipate growth in sales of agricultural and construction equipment, along with improvements in its cost control, resulting in improved profitability.