Daifuku Earnings: Continued Headwinds but Midterm Outlook Intact

Daifuku’s 6383 June-quarter operating income disappointed due to a negative mix from a less profitable cleanroom project as well as a delay in a relatively profitable one. However, the company confirmed that the former was from an older order, and expects the latter to complete in the September quarter. As such, this is mainly a timing issue and we expect limited impact in full-year earnings. The weak demand for its cleanroom business, in which June-quarter orders fell 60.5% year on year, was expected given ongoing cyclical downturn for the chip industry and the high base effect. This is in line with our assumed 5.5% full-year drop in cleanroom sales for 2023.

We maintain our fair value estimate of JPY 3,500 with largely unchanged assumptions that indicate flat earnings this fiscal year followed by an 18.9% rebound in 2024. We believe Daifuku’s shares are undervalued, as the market is underestimating its midterm prospects. The market leader of cleanroom automation equipment is well-positioned to grow along with further production expansion by the leading foundries, supported by demand for high-performance computing and high-end mobile electronics.

Our group top-line projection remains largely unchanged, as we continue to expect revenue to remain flat for 2023, followed by a 6.7% year-on-year growth in 2024. Daifuku’s other revenue driver, the intralogistics segment, has also been facing headwinds as a result of declining e-commerce and warehouse automation investments. However, we expect orders to pick up in 2024, as the skilled labor shortage in Japan and further penetration of warehouse automation in the U.S. and Asia provide opportunities for Daifuku. Although we reflect near-term expectations of higher components and labor costs and slightly lower our 2023 and 2024 companywide operating margin assumptions to 9.2% and 10.3%, respectively, (down from 9.5% and 10.5% previously), we expect capacity utilization to improve and cost pass throughs to take effect in 2024.