EUR 850.00 For Business Accounts Only

Morningstar | Yaskawa’s Growth Slows in 2Q; FVE Reduced to JPY 3,800

Narrow-moat Yaskawa’s second-quarter results showed a drastic slowdown from the strong first-quarter growth. Revenue grew 19% in the first quarter but declined by 1% in the second. Operating income grew by 30% in the first quarter but declined by 9% in the second. 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. Both the key motion control and robot segments slowed down in the second quarter with sales declining 4.4% and 1%, respectively. Given the weaker-than-expected first quarter we’ve lowered our forecasts slightly, and nudged down our fair value estimate to JPY 3,800 from JPY 3,900, which implies a forward P/E of 22.5 times and EV/EBITDA of 12 times. The stock price has declined around 47% from a peak of just over JPY 6,000 in January this year and is now around 15% below our fair value estimate but not yet by enough of a margin to recommend buying given the high uncertainty rating.

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 24% from China, 16% from the Americas, 14% from Asia ex-China, and 13% from Europe. Its geographical and product diversification helps it to weather weaker conditions in certain markets and products. Sales for the AC servo and controller business were strong in growth areas such as lithium ion batteries but demand was weak from semiconductor and smartphone segments. For the drives business, sales remained strong due to tightening of environmental regulation in China and steady U.S. oil & gas-related demand. Robotics demand was also negatively impacted by smartphones but auto-related sales were strong in Japan, Europe, and China.

We continue to 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 expenditures which is a 6.0% capital expenditure/sales ratio on the new sales target. This is a large increase on the average of 3.9% over the previous 10 years. Although consensus forecasts have increased slightly since the first quarter consensus is forecasting a 5.8% ratio in fiscal 2018 declining to 4.4% by fiscal 2020. We forecast 6% in fiscal 2018 declining to 5.5% by 2020.