Daikin Reports Strong 1Q Earnings; But Shares Remain Overvalued

No-moat Daikin reported record high first-quarter fiscal 2020 (year ending March 2020) earnings, with operating profit rising 8% year over year to JPY 89.6 billion. Although net profit accounted for 32% of our original full-year forecast, we keep our estimates largely unchanged, given that first-half earnings are seasonally stronger. We increase our fair value estimate to JPY 10,200 per share from JPY 10,100 to take into account the time value of money. In our view, Daikin’s shares remain overvalued, as we believe earnings growth is losing momentum. We project earnings CAGR of 3% in our explicit five-year forecast, compared with the historical three-year GAGR of 11%. Company management itself expects flat profit this year.