Construction: Correction: Electrical Engineering: Eyes on Kandenko, Kraftia

Research evidence excerpt

Construction: Correction: Electrical Engineering: Eyes on Kandenko, Kraftia

Recent share price declines (due to

concerns such as Middle East supply chain risks) have resulted in P/E levels coming down.

However, supply/demand in the industry remains tight (capacity shortages), which should

sustain expectations for improvement in construction margins at the point of order. The

recent earnings season confirmed business conditions are in place for earnings growth

over the long haul, which precludes any need to cut our target P/Es sharply this time. As

noted in our P/E framework, we believe Kinden’s P/E will be valued at a lower level than

Kandenko’s, and accordingly we set a P/E lower than that of Kandenko.

Basis for our ranking: Based on our F3/28 EPS forecasts, our stocks are trading (June 11

close) as follows: Kandenko 14.5x, Kinden 15.6x (adjusted), Kraftia at 11.4x.

(1) Although the P/E gap between Kandenko and Kinden has narrowed following Kinden’s

announcement of a large-scale share buyback, Kandenko's valuation remains

undemanding; (2) while there is no significant difference in future earnings growth

prospects, we believe, as discussed above, that there will be phases where Kandenko’s P/E

is valued more highly; (3) given the upside implied by our price targets, we continue to

favor Kandenko.

Kraftia also operates in a favorable environment similar to Kandenko & Kinden, with no

major difference in earnings growth from those two. Accordingly, we believe Kraftia's

current valuation discount is overdone.

Kraftia's discount likely reflects pending approval from Nagasaki Prefecture (Ukujima

Mega Solar Project) and concerns over potential cost recognition. Key points to watch

ahead are: (1) confirmation of approval from the Nagasaki government; and (2) progress in