Hoshizaki Earnings: Near-Term Margins to Be Affected by Turkey’s Inflationary Environment

While wide-moat Hoshizaki’s June-quarter revenue growth of 20% year on year was above our previous estimate, the decline in operating margin to 11% from 12% was a negative surprise, mainly due to an inflation accounting treatment of its recently consolidated Turkey-based subsidiary, Ozti. As the inflationary environment in Turkey persists, the company expects further related costs in the second half of fiscal 2024. As a result, we cut our operating income by 4% to JPY 47 billion for fiscal 2024, assuming 12% revenue growth and 11.2% operating margin. However, we maintain our fair value estimate of JPY 5,500 per share, as our medium-term outlook remains unchanged. We think the market is overly concerned about the profitability of Hoshizaki’s overseas business being affected by the consolidation of Ozti and the strengthening yen. Over the longer term, we expect margins to improve for Ozti, as the inflationary environment in Turkey settles down and capacity utilization increases from selling its basic/medium-range products through Hoshizaki’s sales channels in emerging markets.