Omron Earnings: Weak Digital Investments To Affect Sales, but Shares Are Undervalued

We lower Omron’s 6645 fair value estimate to JPY 8,900 from JPY 9,100, based on a weaker near-term outlook for the company’s industrial automation business, which makes up above half of companywide revenue. While IAB’s June-quarter sales growth of 9.5% year on year was in line with expectations (excluding exchange rate effects), we have a softer outlook for semiconductor investments and IA demand in China. The company confirmed that digital-related demand has been recovering at a slower pace than previously expected, with orders remaining sequentially flat, and we expect orders to remain stagnant until the March quarter next year. We lower our fiscal 2023 IAB sales growth assumption to a 12.5% decline, down from 7% decline previously. While the market reaction from the earnings announcement was negative, we think the market is underestimating IAB’s outlook from 2024 onward. We, therefore, believe Omron’s shares are undervalued and a pick-up in digital/semiconductor-related investments toward the end of the fiscal year will serve as a catalyst for its shares.

Our midterm outlook remains largely intact, as we continue to project IAB sales to grow 7.5% CAGR between 2023 and 2027. Although IAB’s exposure to digital industries as well as the Asia ex Japan region (comprising 40% segment sales) suggests near-term headwinds, we think the company’s increased investments/headcount in IAB in the June quarter is a strong signal for longer-term demand expectations. As part of its i-automation strategy, Omron has been proposing automation solutions comprising its vast product line, including the programmable logic controller, sensors, and mobile/collaborative robots, with a focus on targeting domains like digital, electric vehicles, food, and healthcare. We see continued progress on this end, as the segment added 150 related customers in the June quarter, to about 3,850, which contributed to improved quarterly gross margin for IAB, from last year, according to the company.