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Morningstar | Yaskawa’s FVE Reduced to JPY 3,400 with Global Investment Confidence Declining. See Updated Analyst Note from 12 Jul 2019

Narrow-moat Yaskawa’s first-quarter results showed continued slowdown with revenue down 16%, operating income down 58%, and net profit down 70%. Part of the decline was due to the much stronger conditions still prevailing in the first half of last year, with comparable quarters to get much easier in the second half but clearly a slower smartphone market and weakened confidence due to the U.S.-China trade conflict are impacting on demand. We retain our positive long-term view on the outlook for automation and robotics and Yaskawa’s position as one of the leading manufacturers in this space, but the sector is extremely cyclical and current conditions are likely near the bottom of the cycle. Given the weaker-than-expected first quarter we have lowered our forecasts slightly and nudged down our fair value estimate to JPY 3,400 from JPY 3,600, which implies a forward P/E of 34.3 times and EV/EBITDA of 17.4 times. We would look for more of a margin of safety before buying the stock.

Motion control revenue, which represents 45% of total revenue declined by 22% this quarter with the operating margin falling to 12.6% from 20.1%. AC Servo & Controller decreased due to weak investment in the semiconductor market and the expansion of trade friction between the U.S. and China. The drives business was solid due to decent demand for oil and gas in the U.S. Robotics revenue, which represents 39% of total revenue declined by 11% with the operating profit margin declining to 4.6% from 11.4% previously. Investment in automation in general industries was sluggish. Automobile-related sales including such products as welding and painting robots were solid in Japan and Europe but were relatively weak in the Americas.

Sales declined in every geographical market but were weakest in Asia with China declining by 30% and Asia ex-China down 35%. The decline in Asia ex-China was mainly from adjustments in the Korean semiconductor market due to decreased demand. The Japanese domestic market, which generates 35% of revenue was down only 2.6% due to the demand in the Japanese automobile market remaining steady, amid declining semiconductor-related investments. The company’s geographical and product diversification usually helps it to weather weaker conditions in certain markets and products but it becomes difficult when every region is down.

Sales for the general industries were stagnant due to continued shrinking demand in the smartphone-related sector. Worldwide smartphone shipments grew 3% in 2016, were flat in 2017 and declined 4% in 2018. At the beginning of 2019, most industry forecast specialists were forecasting a rebound in smartphone sales growth this year of low-single digits but these forecasts are being ratcheted down with most now forecasting declining shipments this year and TrendForce forecasting 7% decline.