Daikin Reports Largely in Line Nine-Month Fiscal 2020 Results; Shares Overvalued

There are no major surprises in no-moat Daikin’s nine-month fiscal 2020 (year ending March 2020) results, with operating profit increasing by 2% year over year to JPY 219.1 billion. After fine-tuning our earnings model and updating our foreign exchange assumptions, we raise Daikin’s fair value estimate to JPY 10,800 from JPY 10,400. That said, Daikin’s shares remain overvalued in our view, given the firm’s slower earnings growth going forward. We expect Daikin’s earnings CAGR to decelerate to 4% in our explicit five-year forecast, compared with the historical three-year CAGR of 11%. The firm guided for net profit growth of 3% year over year in fiscal 2020, as higher sales are partly offset by the appreciation of Japanese yen.