Keyence Earnings: Weak Outlook in Asia but Continues to Outperform Peers

Our outlook for Keyence 6861 is unchanged as September-quarter results reaffirm that demand is affected by sluggish semiconductor/electronics investment in Asia, while sales in other areas/regions remain resilient. Quarterly revenue declined 3% year on year, but sales in the Americas and Europe grew 7.5% and 10% year on year, respectively, on a local currency basis. We think the company outperformed its peers, as this was in contrast with the September-quarter exports of Japanese control equipment including sensors, factory automation systems, and others, which declined 27% and 16% year on year in North America and Europe, according to the Nippon Electric Control Equipment Industries Association. We attribute this to Keyence’s strong know-how with machine vision/sensors, which has enabled the company to offer low-cost solutions that immediately realize savings and address labor shortages. We expect this to continue and maintain our fair value estimate for Keyence at JPY 58,000. We believe its shares are fairly valued.

We lower our fiscal 2023 revenue projection, ending March 2024, to 0.9% year-on-year growth (down from 1.6% previously), based on a weaker outlook for its domestic sales. September-quarter sales in Japan declined 3% year on year, compared with 3.5% growth in the June quarter, due to weak semiconductor/electronics and automotive/transportation investments. Despite this, our midterm revenue CAGR projection of 12% between 2023 and 2027 remains unchanged, as sensors/machine vision in factories will be necessary amid the Internet of Things trend. The company’s stance to increase its salesforce this year, even after its significant global headcount increase in 2022, supports our expectations. Although this will affect the company’s 2023 operating margin, which we project to decline year on year by 3.1 percentage points to 51.0% (down from 52.0% previously), we expect the company to increase its share in the high-end machine vision space over the medium term.