Fanuc (6954) Results Comment – Futuristic Factories

Key Points

• Robotics global demand and China FA spending is on an upswing 
• H1 FY17 profits could come 20% above guidance 
• Depreciation / labour costs for ongoing capacity / R&D expansion, however, likely lowers H2 FY17 earnings 20-25% HoH 
• Reflecting these costs, H2 FY17 company guidance is for weaker OP (-31% HoH) and sales (-10% HoH), though guidance also assumes high-margin Robodrill sales disappear to (almost) nothing, rather than halve (as we do) in H2 
• Fanuc forecasts H2 FY17 OPM to fall 7ppts (from 30.7% to 23.5%) on higher costs and weaker Robodrill sales; we see a 5ppt decline 
• Japan-based production focus remains though second site in Ibaragi reduces Mt. Fuji HQ geographic risk; automation levels being raised 
• There is a doubling of R&D space, huge upgrade in R&D equipment, and brick designed, landscaped new buildings: all convey a silicon-valley / university campus feel 
• Robotics still main earner in FY17 and FY18, but FA improving and FIELD (next-generation factory automation) contributes from FY19 
• High-margin Robodrills may only recover to a third of the FY14 peak but fixed costs have been lowered and we expect decent demand from non-Apple makers in H1 FY18 to contribute 
• We continue to like Fanuc as a core long-term holding but expect steady rather than dramatic growth over the next 3 years, with FY18 likely to see flat profits amid rising sales.