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

Japan: Relative Price Score Update - Overbought and Oversold Sectors & Peer Groups

Shimadzu (7701 JP): Sales and Profits Stop Growing

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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

On Wednesday, September 26, Shimadzu closed at a new high of  ¥3,610, up 16% in the last two weeks, up 39% since February and up 65% from its 52-week low of ¥2,184. 1Q results were excellent, but were supported by special factors, and both management's guidance and industry data point to a slowdown in demand for semiconductor production equipment and, therefore, the company's turbo-molecular pumps. Valuations are also at new highs and the indicated dividend yield is less than 1%. In 1Q of this fiscal year (the three months to Jun-18), sales of liquid chromatographs, gas chromatographs and mass spectrometers - historically the company's core products - were up 4% to ¥27.4 billion, while sales of water quality monitoring and other Analytical &amp; Measuring Instruments were up 24% to ¥24.4 billion led by strong demand from China. Diversification has been a success, but 24% growth does not look sustainable. Sales of turbo-molecular pumps to makers of semiconductor and FPD production equipment were up 14% to ¥4.9 billion, sales of hydraulic equipment were up 7% to ¥3.3 billion, and sales of other Industrial Machinery, including glass fiber winders and heat treatment furnaces for ceramics and carbide tools, were up 92% to ¥3.7 billion. Glass winder and pump sales are likely to drop back this quarter or next, while furnace sales level off.Consolidated sales growth is therefore likely to drop from 13% in 1Q to 5% in FY Mar-19 as a whole, in our estimation, while operating profit growth drops from 48% to 10%. Next fiscal year, we expect sales and profit growth on the order of 4%. Risks to our forecast include a materially weaker yen, which would be positive, and a more serious downturn in sales than we are forecasting due to the trade war and capital spending cycles.The shares are selling at 32x our EPS estimate for this fiscal year, 17x projected EV/EBITDA and 3.6x book value. The P/E is the highest since the aftermath of the Lehman Shock. Other valuation multiples are at record highs.  The five-year historical P/E range is 13x - 30x. <div class="content-highlight">Shimadzu manufactures analytical and measuring instruments, medical equipment, aircraft components and industrial machinery. It supplies universities, laboratories, hospitals and a wide range of industries including food, chemicals, pharmaceuticals, machinery, vehicles, military and civilian aircraft, semiconductors and flat panel displays. Roughly 80% of the company’s products are made in Japan, the rest in the USA, Europe and China. The geographic breakdown of sales is roughly Japan 50%, China 18%, Other Asia 9%, America 13%, Europe 7% and Other Regions 3%. Shimadzu is expanding in India, Russia, Brazil, South Africa and other developing country markets. </div>

On Wednesday, September 26, Shimadzu closed at a new high of  ¥3,610, up 16% in the last two weeks, up 39% since February and up 65% from its 52-week low of ¥2,184. 1Q results were excellent, but were supported by special factors, and both management's guidance and industry data point to a slowdown in demand for semiconductor production equipment and, therefore, the company's turbo-molecular pumps. Valuations are also at new highs and the indicated dividend yield is less than 1%. In 1Q of this fiscal year (the three months to Jun-18), sales of liquid chromatographs, gas chromatographs and mass spectrometers - historically the company's core products - were up 4% to ¥27.4 billion, while sales of water quality monitoring and other Analytical &amp; Measuring Instruments were up 24% to ¥24.4 billion led by strong demand from China. Diversification has been a success, but 24% growth does not look sustainable. Sales of turbo-molecular pumps to makers of semiconductor and FPD production equipment were up 14% to ¥4.9 billion, sales of hydraulic equipment were up 7% to ¥3.3 billion, and sales of other Industrial Machinery, including glass fiber winders and heat treatment furnaces for ceramics and carbide tools, were up 92% to ¥3.7 billion. Glass winder and pump sales are likely to drop back this quarter or next, while furnace sales level off.Consolidated sales growth is therefore likely to drop from 13% in 1Q to 5% in FY Mar-19 as a whole, in our estimation, while operating profit growth drops from 48% to 10%. Next fiscal year, we expect sales and profit growth on the order of 4%. Risks to our forecast include a materially weaker yen, which would be positive, and a more serious downturn in sales than we are forecasting due to the trade war and capital spending cycles.The shares are selling at 32x our EPS estimate for this fiscal year, 17x projected EV/EBITDA and 3.6x book value. The P/E is the highest since the aftermath of the Lehman Shock. Other valuation multiples are at record highs.  The five-year historical P/E range is 13x - 30x. Shimadzu manufactures analytical and measuring instruments, medical equipment, aircraft components and industrial machinery. It supplies universities, laboratories, hospitals and a wide range of industries including food, chemicals, pharmaceuticals, machinery, vehicles, military and civilian aircraft, semiconductors and flat panel displays. Roughly 80% of the company’s products are made in Japan, the rest in the USA, Europe and China. The geographic breakdown of sales is roughly Japan 50%, China 18%, Other Asia 9%, America 13%, Europe 7% and Other Regions 3%. Shimadzu is expanding in India, Russia, Brazil, South Africa and other developing country markets. 

Shimadzu Corp

Shimadzu (7701 JP): Sell into Strength