EUR 850.00 For Business Accounts Only

Morningstar | 6506 Updated Forecasts and Estimates from 17 Jul 2018

We are impressed by narrow-moat Yaskawa’s strong first quarter, with operating income jumping 33% year over year, well ahead of full-year guidance of 15%. The key servo motor and robot segments both surpassed management guidance, with sales up 10% and 23%, respectively. Despite the stronger-than-expected first quarter, we’ve retained our existing assumptions and our fair value estimate of JPY 3,900, which implies a forward P/E of 22 times and enterprise value/EBITDA of 13 times. The industry can be volatile and there may be an impact on manufacturing confidence from the recent trade turmoil. The stock price has retreated from a peak of just over JPY 6,000 in January but is still slightly above our fair value estimate, so we would wait for any further price retreat before looking to buy.

Yaskawa’s revenue grew by 19%, almost twice as fast as the company’s unchanged 9.8% guidance. All divisions grew faster than guidance, with high demand from automation of production equipment in the global manufacturing industry. Growth industries include data centres, home electronics, and lithium-ion batteries. Smartphone-related investment saw a lull in China, but areas such as home electronics and environment remained strong. Yaskawa commented that sales for robotics in the general industries were strong, especially in China, on the back of robust demand for production automation in the manufacturing sector overall. Non-Chinese robot producers increased their share of China’s robot sales to 73% in 2017 from 67% in 2016, according to the China Robot Industry Alliance, and the strength reported by Yaskawa may indicate that market share gains are still occurring. While China has a longer-term plan to build up its own robotics companies under the "Made-in-China 2025" plan, we think the impact may be seen more toward the back end of this period, given the intellectual property in these products, which underpins our narrow moat rating for Yaskawa and wide moat rating for Fanuc.

We believe the market may be underestimating Yaskawa’s future capital expenditure. At the company’s fiscal full-year result briefing in April 2018, management indicated that it planned to invest 6% of sales to achieve its long-term business plan “Vision 2025”. Its specific guidance for fiscal 2018 (fiscal year ending February 2019) is for JPY 30 billion of capital expenditure and JPY 510 billion of sales, or a 5.9% ratio. This is a large increase on the average of 3.9% over the previous 10 years. Consensus forecasts a 5.5% ratio in fiscal 2018, declining to 4.1% by fiscal 2020. We forecast 6% in fiscal 2018, declining to 5.5% by 2020.