Yaskawa Electric (6506): Still Preparing for FY18 and a Look Across to Fanuc (6954)

Complementing PSA’s August 17 update on robotics leader Fanuc ‘Small Recovery from FY16 Q3 Expected’ is this update on Japan’s second largest robotics maker and global leader in a/c servomotors, Yaskawa Electric. 
Sales volumes at Yaskawa have shored up coming into FY16 Q2, with continued strength seen for Q3. However, the strong yen impact could pull both sales and OP below FY16 company guidance, although the strength in China, Europe and South America can help keep sales close to guidance, while OP falls 5-8% short (we project 5%, on value-added contributions). The picture improves in FY17 as new products gradually phased in from H2 FY15 begin to contribute to OP with a full contribution likely by FY18. Strong robot demand could also benefit Yaskawa if rivals such as Fanuc begin to face capacity constraints from FY17. 
Despite the recent moves up in machinery stock prices on signs of strength in overseas markets and assumptions of a weaker yen predicated on a US interest rate hike, we are cautious. Unless the yen can weaken to and then remain around the ¥104-105 level for the remainder of FY16, we expect that a number of machinery makers, including Yaskawa, will miss guidance.  

Key Points

• We lower our forward yen assumption to ¥$102 (from ¥$112)
• OP currency sensitivity of nearly 2% impact per ¥1 movement
• A portion of the strong yen in FY16 should be offset by value-added products/pricing
• Cost reduction timing: inverters from H1 FY17, robot controllers from H2 FY17; full impact for both from FY18
• We compare and contrast Yaskawa’s business strategy with Fanuc’s
• On our FY16 numbers, Yaskawa trades at 23x PER and near 16x EV/OP – levels normally seen in strong growth phases. Until the market moves to FY17 numbers (perhaps next February), we view these valuations as 10-15% too high, even assuming a good medium term outlook.