Kubota Earnings: Price Increases to Mitigate Impact of Weaker Tractor Production for 2024

Kubota’s March-quarter operating income, which remained flat year on year at JPY 103 billion, was well above our previous estimate as price raises mitigated the impact of declining sales/production volumes and capacity utilization did not weaken as much as we had expected. As our concerns about the company’s ability to raise prices for its agricultural machinery during headwinds have eased, we raise our fiscal 2024 operating income estimate to JPY 311 billion from JPY 288 billion, and accordingly revise our fair value estimate to JPY 2,900 from JPY 2,700. While we assume a 0.5-percentage-point operating margin decline year on year to 10.4% in 2024, we expect margins to improve over the medium term, driven not only by a production recovery of its mainstay compact tractors in 2025, but also further aftermarket parts sales as agricultural/landscaping activity picks up. Therefore, we believe Kubota’s shares are undervalued.