Daikin Earnings: Q1 Bottom-Line Miss Not Affecting Secular Earnings Growth; Shares Undervalued

Narrow-moat Daikin reported mixed results for first-quarter fiscal 2024 (ended June 2024). While the top line beat our estimate of robust sales of applied air conditioning products for industrial use and the yen’s depreciation, operating profit lagged because of increases in raw material and fixed costs. Management was confident in achieving the JPY 425 billion operating profit target for fiscal 2024, but flagged that residential product demand will see high uncertainties amid inflationary pressure and slowing economic growth globally. We also expect heightened copper prices and headwinds from Japan’s interest-rate hike to weigh on Daikin’s near-term profitability. Consequently, we lowered our fiscal 2024 operating profit and earnings per share assumptions by 3% and 9%, respectively. That said, we still foresee gradual pickups in Daikin’s margins through fiscal 2028 given product mix upgrades and cost reductions in main regions, which, we believe, have been underappreciated by the market. We maintain our fair value estimate of JPY 25,000 for Daikin and view its shares as underpriced given the recent rout.