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Morningstar | Yaskawa’s FVE Reduced to JPY 3,600 on Trade War Impacts Dragging into 2019. See Updated Analyst Note from 10 Feb 2019

Narrow-moat Yaskawa’s third-quarter results showed continued slowdown from the strong first-quarter growth. Revenue grew 19% in the first quarter, declined by 1% in the second and then grew by 2% in the third. Operating income grew by 30% in the first quarter, declined by 9% in the second and declined by 11% in the third. Smartphone demand from China slowed down and semiconductor capital expenditures were weak. The Chinese manufacturing sector also saw some impact from the U.S./China trade conflict. The company lowered its full-year forecasts by 2% at the revenue line to JPY 498 billion and 10% at the operating profit line to JPY 59 billion, implying 6% second-half revenue growth and a 2% second-half decline in operating income. Given the weaker-than-expected first quarter, we’ve lowered our forecasts slightly, and nudged down our fair value estimate to JPY 3,600 from JPY 3,800, which implies a forward P/E of 22.8 times and EV/EBITDA of 14 times. The stock price has declined around 35% over the past year and is now around 19% below our fair value estimate.

Motion control revenue, which represents 43% of total revenue declined by 10% this quarter after growing at over 30% in the first half. The segment performance stagnated because sales for AC servo & controller business slowed down especially in China and other Asian countries, although sales for drives business were steady globally. The operating profit fell to 14.7% from a peak of 20.7% in the first quarter. Robotics revenue, which represents 39% of total revenue grew 9% after growing 23% in the first half of the year. Sales and profits were strong on the back of robust global demand. Automobile-related sales including such products as welding and painting robots were strong globally.

Sales especially in the European market grew significantly. Sales for the general industries were stagnant due to shrinking demand in the smartphone-related sector, which was strong in the previous year. We note that industry forecast specialists are typically forecasting a rebound in smartphone sales growth this year of low-single digits after declining by around 4% over 2018 in terms of volumes of smartphones shipped from vendors.

The sensitivity of Yaskawa’s business to changing global manufacturing conditions was highlighted this quarter but the company’s narrow moat allowed it to continue to report solid operating margins of 11%. The company earns 32% of its sales from Japan, 22% from China, 17% from the Americas, 14% from Asia ex-China and 14% from Europe. Its geographical and product diversification helps it to weather weaker conditions in certain markets and products.