Daifuku Earnings: Raise Our Fair Value 3% to JPY 3,660 to Reflect Improving Pricing Power

While wide-moat Daifuku’s September-quarter revenue growth of 7% was in line, its operating margin of 13.8% was up from 11.3% in the June quarter and 7.4% in the previous September quarter, again exceeding our estimate of 11.5%. Daifuku has successfully passed on material and labor costs in sales prices, improving gross margin to 23.2% in the September quarter from 16.6% a year earlier. We believe the solid profitability is indicative of Daifuku’s pricing power, which is supported by high switching costs for its customers and Daifuku’s long-term track record of providing solutions to its customers. As we expect the price pass-through effect to continue for at least one more quarter, we raise our fiscal 2024 operating margin assumption to 12% from 10.5% and our fair value estimate for Daifuku to JPY 3,660 from JPY 3,500. Although Daifuku’s shares have jumped by more than 10% since the announcement last Friday, we believe the shares are still undervalued as the market is overly concerned about the maintainability of the current margin in the longer term.