Daifuku’s Cleanroom Automation Business Showing Better Clarity on Growth Prospects; Raising FVE

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.