Fanuc (6954) FY17 H1 Update & Upside – Robodrill Runner

Key Points
• Main uncertainty for Fanuc – soaring depreciation and start-up costs from H2 FY17 – alleviated, with sharply improved H2 OPM guidance.
• Initial April guidance for H1 OPM of 30.7% was originally 7.2ppts above H2 OPM guidance of 23.5%; actual H1 OPM pf 30.9% is now just 1.4ppts above latest H2 OPM guidance of 29.5%.
• Of the four business divisions, management in April assumed strong Robotics and Services for all of FY17, but FA and Robomachine (Robodrill) demand was guided to end in H1, due to order visibility.
• Two changes to H2 guidance: (1) Robodrill orders now to continue strongly in H2; and (2) FA demand to increase, rather than decrease. Hence low guided OPM for H2 FY17 of 23.5% (Apr) and 24.4% (Jul) has been raised to 29.5% (Oct).
• H1 FY17 OPM guidance by contrast was static: 30.74% (Apr), 30.66% (Jul) and actual at 30.90%, despite rising sales; sales guidance was raised 10% in July and actually came in a further 6% higher.
• Product mix is an important driver of OPM improvement. The cost burden peak for capacity and R&D expansion (H2 FY17 and H1 FY18) is less daunting now and we expect a sharp OPM upswing from H2 FY19.
• Management often mentions “profit recovery” from FY20. We note that even in FY18, Robodrill demand could offer OPM upside above our forecast and FA volumes may exceed our projections.
• Automation is a 2-3-year market theme, where growth is a given and valuations are already moving to FY18, earlier than for other sectors. That said, we see fair value for automation leader Fanuc at 20x EV/OP and 30x PER, which is ¥27,500 on our FY18 figures. However fair value could be 15-25% higher if the wild card, Robodrills, sees a sharp recovery in FY18, as discussed in this report.