Strong air conditioning orders lead us to raise our forecasts and price target

Research evidence excerpt

Strong air conditioning orders lead us to raise our forecasts and price target

227.8 302.2 33 278.7

centres are planned for FY3/27. We forecast record-high orders of ¥232.0bn (+7% yoy)

03/28E 209.0 314.2 50 307.3

in FY3/27. The company’s FY3/27 forecast factors in rising material prices and other

03/29E 193.7 317.5 64 315.5

impact from the Middle East situation, but price pass-through appears feasible, and we

therefore expect the segment’s FY3/27 OP margin to reach 12.2% (+1ppt yoy), higher Mariko Watanabe

than the company plan of 11.1%. For the industrial systems segment, we expect profit Analyst

to continue to achieve record highs, driven by increasing investments in Japan and Asia. mariko.watanabe@ubs.com

+81-3-5208 6297

Profit margins on paint finishing systems have stabilised

Paint finishing systems had repeatedly been unprofitable in the past, but OP margins

have stabilised, at 3.5% in FY3/25 and 4.1% in FY3/26, due to measures to improve

profitability partly through enhancing productivity. We forecast orders of ¥98bn for

FY3/27 (-31% yoy) in reaction to large-scale orders in Europe, but expect near-term

orders at ¥90-100bn, assuming capex for replacements in North America, Japan, and

Europe, and solid demand to boost output in India. For paint finishing systems, there is

intense competition for orders from non-Japanese OEMs, and the OP margin gap

between the company and the largest player, Durr (8% in FY12/25), is likely to persist.

We forecast the OP margins at just below 4%.

Valuation:

We base our price target on a residual income model for FY3/27. Reflecting a decline in

beta, we are lowering COE from 7.3% to 6.2% (0.7 for beta, 2.7% for RFR, and 5% for

risk premium), and lifting ROE from 9.3% to 11.6%. Our price target equates to a