Daikin’s Fiscal 2020 Results Affected by Coronavirus; More Challenges Ahead; Shares Overvalued

No-moat Daikin’s fiscal 2020 (year ending March 2020) results were below expectations, with operating profit decreasing by 3.9% year over year to JPY 265.5 billion, largely attributable to appreciation of the Japanese yen and negative impact from COVID-19. After rolling forward our model and updating our foreign exchange assumptions, we raise Daikin’s fair value estimate to JPY 11,400 from JPY 10,800. While we expect the pandemic to continue to pressure fiscal 2021 results, we expect a sharp turnaround in Daikin’s business once COVID-19 is contained. That said, Daikin’s shares remain overvalued at the current price in our view, given the firm’s slower earnings growth going forward. We anticipate Daikin’s earnings CAGR to decelerate to 4.8% for fiscal 2019-25, compared with the three-year CAGR of 10.8% for fiscal 2016-19.