A fresh look at Keyence – download our free report!


A fresh look at Keyence

Our research specialists explain the complex financial statements of Keyence, a successful Japanese provider of industrial automation and services.

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Keyence has established its highly profitable business model worldwide, becoming a significant supplier of factory automation and inspection products and services to manufacturing and R&D customers in all major markets. But after six years of expansion, the appreciation of the yen combined with a weak global economy has brought sales and profit growth nearly to a halt. In the three months to September, sales were up 2.6% year-on-year and operating profit down 0.1%.

In the year to September, the yen appreciated by about 15% against both the U.S. dollar and the euro. If that hadn’t happened, management estimates that sales and operating profit would have increased by about 13% year-on-year in the six months to September. With the yen now weakening again, we expect growth to resume and, barring recession, continue at moderate rates for at least the next 2-3 years. Underlying demand for the company’s industrial automation and inspection products should also continue to grow, in our estimation, supported by technological advance and manufacturing upgrades worldwide. The issue for investors is, how much do you want to pay for this?

At ¥77,010 (November 22nd close), the share price is near the all-time record high of ¥77,890 reached in October this year. The shares are now selling at 32x our EPS estimate for the year to Mar-17, 18x EV/EBITDA, 4.0x book value and 12x sales. These valuations are near the top of their 10-year historical ranges and are likely to drop only to 27x, 15x, 3.2x and 10x by March 2019, in our estimation.

Keyence has a very strong balance sheet, with total cash & securities (including long-term investment securities) amounting to ¥981.6 billion, or 89.5% of equity, at the end of September 2016, and zero debt. Despite this – and despite an annual return on financial assets of less than 1% – ROE is 12%. The annual dividend was raised from ¥60 to ¥200 in the year to March 2015, but the dividend payout ratio remains below 10% and management talks about maintaining a stable dividend, not another large increase. Cash might also be used to make acquisitions, but no M&A strategy has been made public. In the meantime, cash & securities are increasing at an annual rate of more than ¥100 billion, raising another question for investors: what does management plan to do with all this money?