Company Reports

While Daifuku’s June-quarter revenue growth of 8% was in line, its operating margin of 11.3% was up from 6.1% in the year-ago quarter and exceeded our expectations. This was a positive surprise as the June quarter is typically a low season for the company. In addition to the price hike and cost-cutting initiatives for the clean room segment, we believe profitable deals in China for legacy chip investments helped improve the product mix. As a result, we raise our fiscal 2024 operating margin assumption to 10.5% from 9.5% as we expect this trend to continue for at least one more quarter. The strong June-quarter results support our view that the market is overly concerned about the slowdown in legacy chip investment in China, while high-end chip investment remains sluggish. We think that China will continue to invest in expanding domestic chip production capacity and demand for high-performance computing will pick up in 2025. We maintain our fair value estimate of JPY 3,500 for Daifuku and believe the stock is undervalued.

We maintain our fair value estimate for Daifuku of JPY 3,500, as our demand outlook is unchanged, and the adjusted fiscal 2024 operating income guidance of JPY 65.5 billion is in line with our projections before the fiscal year-end change announcement. As expected, the order guidance for the first half of 2024 suggests a mild demand recovery, as the company assumes cleanroom orders to increase 4% year on year and intralogistics orders to increase 2% year on year. We believe Daifuku’s shares are fairly valued.

Although Daifuku’s December-quarter operating margin of 11.5% was above our expectations, we estimate that it was largely in line with our forecast, excluding the impact of a one-time improvement in product mix from high-margin projects. Daifuku’s share price surged more than 10% after the earnings announcement, which we attribute to revised expectations of margin expansion. However, we believe the market was overly pessimistic about the margin recovery in the second half of fiscal 2023 (ending March 2024), driven by cost pass-through and structural reforms, which we had anticipated. Therefore, while we fine-tune our near-term earnings forecasts, our medium- to long-term outlook is largely intact, and we maintain our fair value estimate at JPY 3,500. As a result of the rally after earnings were announced, Daifuku’s share price has approached our fair value estimate; therefore, we believe the current stock price is fairly valued.

We maintain our fair value estimate of Daifuku at JPY 3,500, after adjusting our projection based on the September-quarter results. The warehouse/cleanroom automation space has been facing headwinds, as the total September-quarter orders declined 13% year on year. However, we think orders have bottomed, as this was still a 26% sequential increase. Quarterly orders for the intralogistics, or IL, segment were stronger than expected with a 34% year-on-year increase, compared with negative 37% in the June quarter. While global warehouse automation demand continues to be sluggish, the impact was mitigated by large-scale seasonal renovation/upgrade projects by existing customers in North America and the weak Japanese yen. We maintain our outlook that automation investments will pick up in the first half of fiscal 2024, and project Daifuku’s revenue to grow 7.4% year on year in 2024 (up from 6.7% previously) after remaining flat in 2023, followed by 6.6% CAGR between 2023 and 2027. We believe the market is underestimating Daifuku’s medium-term growth potential, driven by secular trends such as the shortage of skilled labor in Japan and the further penetration of warehouse automation in the U.S./Asia.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

We assign Daifuku a Morningstar Uncertainty Rating of Medium, based on our revised expectations of material handling equipment demand for warehouses, factories, and airports. Although the pandemic-induced e-commerce demand had previously led to a surge in orders and increased the uncertainty for its intralogistics business, we expect demand will be relatively stable after the current postpandemic slowdown from 2024 onward. Further, the company’s balanced exposure to various customer industries and stable service income (which makes up approximately 20% of intralogistics sales and above 45% of automobile/airport sales) will mitigate the impact of demand fluctuations in highly cyclical industries.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

Daifuku’s June-quarter operating income disappointed due to a negative mix from a less profitable cleanroom project as well as a delay in a relatively profitable one. However, the company confirmed that the former was from an older order, and expects the latter to complete in the September quarter. As such, this is mainly a timing issue and we expect limited impact in full-year earnings. The weak demand for its cleanroom business, in which June-quarter orders fell 60.5% year on year, was expected given ongoing cyclical downturn for the chip industry and the high base effect. This is in line with our assumed 5.5% full-year drop in cleanroom sales for 2023.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

Daifuku’s fiscal 2023 (ending March 2024) revenue growth guidance of 0.5% year on year was below our expectations, largely due to weaker-than-expected sales in the Intralogistics business, or IL, which is the company’s largest business. As the segment will be affected by weak e-commerce investment globally this year, we now project IL sales to decline 7% year on year (down from 5% growth previously), which is largely in line with guidance. IL orders declined sequentially by 28.5% in the March quarter, which was worse than the typical seasonal decline. While we expect continued headwinds over the near term, we think IL orders will pick up in the fourth quarter. Moreover, our longer-term outlook remains intact, and we therefore maintain our fair value estimate of JPY 3,500. We believe the market is underestimating IL’s medium-term prospects, as a skilled labor shortage in Japan and room for further penetration of warehouse automation in the U.S./Asia provide opportunities for Daifuku. As such, we think the company’s shares are undervalued.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

While companywide orders in the December quarter grew 14.6% year on year, supported by the weak yen, orders in the cleanroom business, or CR, declined 23.5% after seven consecutive quarters of annual growth. This was inevitable, given the record orders last year and the recent slowdown in capital spending for semiconductors. As chipmakers hold back on investments, we expect headwinds for Daifuku in 2023. However, we retain our fair value estimate of JPY 10,500, as our longer-term outlook remains intact. With a track record of supplying high-end semiconductor handling equipment (for 5 nm and below) to leading foundries, the wide-moat company is strongly positioned to grow along with secular demand for high performance computing, or HPC, and high-end mobile chips. We therefore expect CR orders bottoming out will serve as a catalyst for the stock.

While a slowdown in Daifuku’s orders related to e-commerce and semiconductor production (especially memory) will temporarily affect top-line growth in 2023, we expect growth rates will increase to our midcycle trajectory in the following year, as demand picks up again. The upward revision in guidance orders for fiscal 2022 (ending March 2023) reaffirms our expectation that the company can still realize top-line growth in 2023, especially considering the record backlog. Management estimates total orders to be JPY 710 billion, up from JPY 630 billion previously, and well above the revenue guidance of JPY 580 billion. Over the longer term, secular factors like low warehouse automation penetration and need for advanced semiconductors will be tailwinds for the leading material handling company. Therefore, we think its shares are undervalued and retain our fair value estimate at JPY 10,500.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

Daifuku’s June quarter operating margin fell to 7.9% from 8.7% last year, which fell short of our expectation; however, orders remain strong and our medium-term outlook remains largely intact. Margins were affected by 1) additional expenses from a large-scale flat-panel-display cleanroom, or FPD CR, project in China coming to a halt during the lockdown, and 2) higher-than-expected project costs (includes components/labor/logistics). While we do not foresee further material costs from the FPD project, we now expect higher project costs (especially labor) for the next two years. After considering this and reassessing our depreciation estimates, we lower our fiscal 2022 and 2023 (ending March) operating margin projection to 10.2% and 11.5%, respectively, from 10.5% and 12.0%. In spite of this, our midcycle operating margin assumption of 13.0% in 2026 remains unchanged, and we therefore maintain our fair value estimate of JPY 10,500.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

We raise our fair value estimate for Daifuku to JPY 10,500 from JPY 10,000, from mainly higher medium-term operating income growth expectations from the cleanroom, or CR business. Shares are undervalued, as concerns over rising components/logistics costs, labor shortage issues in the U.S., and slowdown in the e-commerce market have likely contributed to the year-to-date decline in its share prices; however, the recent recovery this week showed that the company’s decision to raise its midterm revenue target for fiscal 2023 and strong guidance were met with a favorable reaction. While a slowdown in e-commerce spending will likely make it difficult for Daifuku’s intralogistics, or IL, business to realize the high “pandemic-induced” growth levels of 2020 and 2021, we think the leading material handling equipment supplier is well-positioned to capitalize on warehouse and cleanroom automation trends, as the need to keep pace with demanding order fulfillment will likely continue.

Daifuku is the global market leader in material handling, which involves the automation behind transport, storage, and control of products/materials in factories, cleanrooms for semiconductor production, distribution centers/warehouses, and airports. The company not only adds value to customers as an equipment supplier but also serves as a system integrator providing material handling solutions based on its products, which include automated storage and retrieval systems, pallet racks, conveyors, sorting systems, automated guided vehicles, and software systems that manage the material handling process. Having supplied to market leaders across various industries, including Toyota, TSMC, Intel, Dell, and Fanuc, the company is leveraging its established know-how in material handling into the warehouse/logistics automation market, which is expected to grow backed by rising e-commerce demand.

Wide-moat Daifuku’s results for fiscal 2021's third quarter, ended September, showed another quarter of modest revenue growth at 8% year on year, in line with our expectations. We maintain our fair value estimate at JPY 10,000, implying that the shares are currently undervalued. The share price has declined year to date, likely due to increased concerns about the company's ability to deliver on projects, given the impact of the ongoing component supply crunch and labor shortage problems in the United States. However, the recent share price recovery suggests some of these concerns have been alleviated, as third-quarter sales were near record levels and operating margin improved to 10% (also in line with our projection) from 8.9% in the year-ago period and 8.0% last quarter. High cleanroom-related orders led to an upward revision in guidance (including dividends), which also likely contributed to the recovery.