Nabtesco Earnings: Weak Near-Term Outlook for Component Solutions, but Shares Are Undervalued

We lower our fair value estimate for Nabtesco to JPY 4,000 from JPY 4,200 as we cut our fiscal 2023 and 2024 revenue assumptions by 3% and 5%, respectively, due to the weaker-than-expected outlook for reduction gears. In the June quarter, orders for reduction gears deteriorated, as they declined 22% year on year, worsening from a 14% decline in the March quarter, which we think caused the negative market reaction. As Nabtesco’s Japanese robotics maker customers, like Fanuc and Yaskawa, also face weaker orders and undergo inventory adjustments, we now expect reduction gear orders to remain weak until the end of the first half of 2024. Consequently, we now project component solutions segment, or CMP, sales to decline 0.5% year on year in 2023, followed by 5% growth in 2024, lowered from 8.4% and 8.6% growth, respectively. Despite the near-term headwinds for CMP, we think the market is overlooking Nabtesco’s longer-term prospects, as demand for the reduction gears will grow along with electric vehicle investments and new robot applications in nontraditional industries. Therefore, we believe the company’s shares are undervalued.