Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Securities analyst covering electronics, precision equipment & robotics, engineering, construction, transport and other sectors for more than 25 years in Japan and 3 years in Korea. Permanent resident of Japan.

Senior Technology Analyst, Japanese Equities

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

Canon Electronics has fallen 40% in the COVID-19 downdraft to the lowest level in nearly four years. At 12x management's EPS guidance for FY Dec-20 and 0.6x sales, the shares look attractive at first glance. But guidance is probably too optimistic and SPACE ONE, the company's satellite launch venture, is likely to be a drain on earnings for at least another two years.In FY Dec-19, operating profit dropped 15.0% on a 1.8% decline in sales due to weak demand for parts for digital and cell phone cameras, scanners and printers, and the cost of preparing SPACE ONE to start launching satellites in 2021. This year, in a weaker economy, management is guiding for flat sales and a 39% decline in operating profit.In view of the economic impact of COVID-19, sales and profit guidance look optimistic. A significant decline in sales is likely and profits could drop by half, with losses possible in 1H.If the economy stabilizes by the end of the year and then recovers, we would expect sales and profits to regain previous levels by 2022. This would bring the projected P/E ratio down to 10x or less. On a five-year view, the success of SPACE ONE could bring it down to 7.5x. But the timing of recovery is unclear and SPACE ONE is behind its American and Chinese competitors.Canon Electronics has a strong balance sheet, which should see it through the downturn. If repeated, last year's ¥80 dividend per share would provide a 5.8% yield, but if profits collapse, it might not be. There is no indicated dividend for this year.  Canon Electronics is a speculative investment in economic recovery and the potential of a rocket launch business that has yet to get off the ground. Short-term risk is high.

Canon Electronics has fallen 40% in the COVID-19 downdraft to the lowest level in nearly four years. At 12x management's EPS guidance for FY Dec-20 and 0.6x sales, the shares look attractive at first glance. But guidance is probably too optimistic and SPACE ONE, the company's satellite launch venture, is likely to be a drain on earnings for at least another two years.In FY Dec-19, operating profit dropped 15.0% on a 1.8% decline in sales due to weak demand for parts for digital and cell phone cameras, scanners and printers, and the cost of preparing SPACE ONE to start launching satellites in 2021. This year, in a weaker economy, management is guiding for flat sales and a 39% decline in operating profit.In view of the economic impact of COVID-19, sales and profit guidance look optimistic. A significant decline in sales is likely and profits could drop by half, with losses possible in 1H.If the economy stabilizes by the end of the year and then recovers, we would expect sales and profits to regain previous levels by 2022. This would bring the projected P/E ratio down to 10x or less. On a five-year view, the success of SPACE ONE could bring it down to 7.5x. But the timing of recovery is unclear and SPACE ONE is behind its American and Chinese competitors.Canon Electronics has a strong balance sheet, which should see it through the downturn. If repeated, last year's ¥80 dividend per share would provide a 5.8% yield, but if profits collapse, it might not be. There is no indicated dividend for this year.  Canon Electronics is a speculative investment in economic recovery and the potential of a rocket launch business that has yet to get off the ground. Short-term risk is high.

Canon Electronics (7739 JP): Downside Risk to Earnings and the Dividend