Security and network demand supports steady growth at Otsuka, but the fading PC replacement cycle and low operating leverage leave profit growth lagging the industry

Overview

This report updates Otsuka's earnings forecasts based on its FY12/26 first-half and second-quarter results (April-June 2026). Goldman Sachs believes strong demand for security products and network-related businesses should enable the company to sustain moderate growth and slightly exceed full-year guidance. However, the fading PC replacement cycle, a rising share of low-margin businesses, and a lack of operating leverage should keep profit growth below the industry. The target price is therefore raised, but the Sell rating is unchanged.

Core views

Following Otsuka's FY12/26 first-half and second-quarter results, Goldman Sachs raised its medium-term earnings forecasts. As demand for security products, network equipment, and system integration was stronger than expected, FY12/26, FY12/27, and FY12/28 operating profit forecasts were each raised by 8%, from ￥88.0bn, ￥93.0bn, and ￥99.0bn to ￥95.0bn, ￥100.7bn, and ￥106.7bn, respectively. EPS forecasts for the same periods were increased from ￥167.7, ￥177.0, and ￥188.0 to ￥181.4, ￥192.0, and ￥203.3, respectively. Revenue is forecast at ￥1,409.8bn, ￥1,474.7bn, and ￥1,549.1bn, corresponding to growth of 6.6%, 4.6%, and 5.0%. The earnings upgrades mainly reflect the SI business rather than a change in Goldman Sachs' view of PC demand trends. FY12/26 operating profit is forecast at ￥95.0bn, up 6% yoy and slightly above the company's revised guidance of ￥94.3bn. Goldman Sachs believes the demand environment for security products, network equipment, and integration provides room for the SI business to exceed guidance. However, growth will not be evenly distributed across quarters: 3Q12/26 (July-September 2026) is a seasonally weak demand period, and the high comparison base from PC replacement demand will disappear. Operating profit is therefore forecast to decline to ￥16bn, down 8% yoy. Although the number of business days is unchanged yoy and underlying IT demand remains healthy, quarterly profit could still turn negative due to the fading PC upgrade cycle. The SI business is the primary source of profit in FY12/26. Goldman Sachs forecasts its sales to rise 6% yoy, or by ￥57.6bn, and operating profit to increase 7% yoy, or by ￥4.83bn. PC sales are forecast to decline by ￥34.7bn yoy, but security product sales are expected to increase by ￥46.4bn, while equipment and integration sales for network infrastructure construction are projected to rise by more than ￥20bn. US Microsoft software licensing should also contribute to growth. Network demand is being driven by infrastructure redesign prompted by rising communications traffic. Meanwhile, the Japanese government plans to introduce a security measures assessment system by the end of the current fiscal year ending March 2027 to evaluate and visualize corporate cybersecurity measures using unified standards. Based on this, Goldman Sachs expects demand for security products to continue expanding in the near term. The PC business remains the main drag. FY12/26 PC shipments are forecast at 164 ten-thousand units, down 24% yoy or 51.2 ten-thousand units, comprising a decline of 49.2 ten-thousand standard PCs and 2 ten-thousand GIGA School PCs. Standard PC demand has turned negative as concentrated purchasing ahead of the end of Windows 10 support in October 2025 has faded, while GIGA School PC demand also began declining in the April-June 2026 quarter. However, the company has successfully passed on higher memory prices, and the average selling price is forecast to rise by more than 10%. The decline in PC sales may therefore be smaller than Goldman Sachs previously assumed. FY12/27 shipments are forecast to fall further to 123 ten-thousand units, down 25% yoy, although the yoy drag on profit from declining PC demand should gradually diminish. The business mix limits margin upside. Declining PC sales are beneficial to the product mix in themselves, but the relatively low margins of network equipment and software licensing offset this positive effect, leaving limited expected improvement in the overall SI margin. In the SS business, FY12/26 operating profit is forecast to rise 3% yoy, or by ￥0.9bn. Consumables sales are forecast to grow 5%; special demand generated by peers suspending shipments should largely fade in the fourth quarter, but demand for everyday essentials remains solid. Maintenance business sales are forecast to increase 9%, led by expansion in software maintenance. As more growth comes from lower-margin maintenance services, the SS business's gross margin may decline, limiting operating profit growth. Goldman Sachs expects FY12/27 operating profit to continue growing moderately, rising 6% to ￥100.7bn, driven mainly by security products and the network business, but still below industry profit growth of approximately 8%. The report notes that Otsuka, as Japan's largest independent IT sales company, has outstanding sales capabilities and can provide software, hardware, networks, maintenance, and comprehensive support to mid-sized enterprises and small and medium-sized enterprises. In its core SI business, hardware accounts for approximately 60%-70% of sales and software approximately 30%-40%. However, most revenue comes from selling other companies' products, and the business model lacks meaningful operating leverage. Profit momentum during the PC downturn is therefore expected to continue lagging competitors. The valuation conclusion is determined by relative earnings growth. Goldman Sachs raised its 12-month target price from ￥2,650 to ￥2,880, based on FY12/27 EPS of ￥192 and a target P/E of 15x. The industry average P/E is 18x. Goldman Sachs applies an approximately 15% discount to the industry valuation because the PC replacement cycle entered a transition phase in the second half of 2025, upgrade demand is fading, and the company's near-term profit growth is materially below the industry. Despite raising both its earnings forecasts and target price, Goldman Sachs still considers the stock's valuation expensive and maintains its Sell rating relative to coverage.

Analysis framework

Goldman Sachs first revised its business-segment earnings forecasts based on second-quarter demand trends, then aggregated changes in volumes, prices, revenue mix, and margins across the SI, PC, and SS businesses into annual and quarterly operating profit forecasts. It subsequently compared Otsuka's expected profit growth with the industry's and derived a 12-month target price by multiplying FY12/27 EPS by a discounted target P/E. Finally, it maintained the Sell rating based on its relative coverage assessment.

Methodology notes

• Valuation methodologyPE/PEG valuation

  Target P/E valuation based on forward EPS

  The report multiplies FY12/27 EPS of ￥192 by a target P/E of 15x to derive a 12-month target price of ￥2,880. The 15x multiple represents an approximately 15% discount to the industry average of 18x, reflecting the company's profit growth lag versus the industry and fading PC replacement demand.

• Industry analysis frameworkVolume-price decomposition

  Decomposition of PC shipment volume and average selling price

  The report decomposes the PC business into volume and price: FY12/26 shipments are forecast to decline 24%, but higher memory prices can be successfully passed on, and the average selling price is forecast to increase by more than 10%, explaining why the decline in PC sales may be smaller than previously expected.

• Industry analysis frameworkSupply-demand framework

  Forecasting security, network, PC, and maintenance businesses based on end-demand drivers

  The report separately examines demand changes arising from the security assessment system, communications traffic and network redesign, the end of Windows 10 support, GIGA School procurement, and peers' shipment suspensions, then assesses the revenue, profit, and duration of each business.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Otsuka (4768.T)

  Security products, network equipment and integration, and software licensing support steady growth, but declining PC demand and a low-margin business mix constrain relative earnings performance.

  Strengths

  One of Japan's largest independent IT sales companies, with outstanding sales capabilities; provides software, hardware, networks, maintenance, and comprehensive support to mid-sized enterprises and small and medium-sized enterprises; strong security and network demand.

  Weaknesses

  The PC replacement cycle is fading, network equipment, software licensing, and maintenance services have relatively low margins, the business model lacks operating leverage, and profit growth lags competitors.

  Comparison

  FY12/27 operating profit is forecast to grow 6%, below the industry's approximately 8%; the target P/E is 15x, an approximately 15% discount to the industry average of 18x.

  Risks

  Stronger-than-expected investment by mid-sized enterprises and small and medium-sized enterprises, a larger or longer-than-expected PC replacement cycle, and enhanced shareholder returns could all present upside risks to the Sell thesis.

Key data

• Earnings forecast revisionsFY12/26-FY12/28 operating profit forecasts raised by 8%/8%/8%, respectivelyMainly reflects stronger-than-expected demand for security products and network equipment and integration in the SI business.
• FY12/26 operating profit￥95.0bnUp 6% yoy and slightly above revised company guidance of ￥94.3bn; previous forecast was ￥88.0bn.
• FY12/27 operating profit￥100.7bnUp 6% yoy; previous forecast was ￥93.0bn.
• FY12/28 operating profit￥106.7bnPrevious forecast was ￥99.0bn.
• FY12/26-FY12/28 EPS￥181.4 / ￥192.0 / ￥203.3Previous forecasts were ￥167.7, ￥177.0, and ￥188.0, respectively.
• FY12/26-FY12/28 revenue￥1,409.8bn / ￥1,474.7bn / ￥1,549.1bnCorresponding to yoy growth of 6.6%, 4.6%, and 5.0%.
• 3Q12/26 operating profit￥16bnForecast to decline 8% yoy, mainly due to fading PC replacement demand and seasonal weakness.
• FY12/26 SI businessSales up 6% yoy or ￥57.6bn; operating profit up 7% yoy or ￥4.83bnSecurity products, the network business, and Microsoft software licensing are the main growth drivers.
• Incremental security product salesUp ￥46.4bn yoyJapan plans to introduce a security measures assessment system by the end of the current fiscal year ending March 2027.
• Incremental network equipment and integration salesUp more than ￥20bn yoyRising communications traffic is generating demand for network infrastructure redesign.
• FY12/26 PC shipments164 ten-thousand unitsDown 24% yoy or 51.2 ten-thousand units; standard PCs decline by 49.2 ten-thousand units and GIGA School PCs by 2 ten-thousand units.
• PC average selling priceUp more than 10%Higher memory prices have been successfully passed on, making the decline in PC sales smaller than previously assumed.
• FY12/27 PC shipments123 ten-thousand unitsForecast to decline 25% yoy.
• FY12/26 SS businessOperating profit up 3% yoy or ￥0.9bnConsumables sales are forecast to grow 5% and maintenance business sales 9%, but the share of low-margin maintenance is increasing.
• Industry profit growth comparisonOtsuka FY12/27 approximately 6%, industry approximately 8%Profit growth is expected to continue lagging the industry.
• Target price valuationFY12/27 EPS of ￥192 × 15x P/EDerives a 12-month target price of ￥2,880; the industry average P/E is 18x, and the target multiple represents an approximately 15% discount.

Impact & implications

Growth in security products and the network business increases the likelihood that Otsuka will slightly exceed FY12/26 guidance and sustain medium-term earnings growth, while also supporting Goldman Sachs' earnings forecast and target price increases. However, more of the growth is being driven by low-margin equipment, software licensing, and maintenance services, PC replacement demand continues to fade, and the business model lacks operating leverage. Revenue growth is therefore unlikely to translate into profit growth above peers. Goldman Sachs consequently believes the valuation should remain at a discount to the industry and maintains its Sell rating.

Risks

• Higher-than-expected IT investment by mid-sized enterprises and small and medium-sized enterprises could present upside risk to the share price.
• A larger or longer-lasting PC replacement cycle, including the GIGA School project, could result in earnings above the report's assumptions.
• Enhanced shareholder returns by the company could produce share-price performance above the report's assumptions.

What to watch

• Monitor whether 3Q12/26 operating profit declines to ￥16bn as forecast, down 8% yoy, and the actual impact of the fading high comparison base from PC replacement demand.
• Monitor the pace of expansion in security product demand ahead of Japan's planned introduction of a security measures assessment system by the end of the current fiscal year ending March 2027.
• Monitor whether FY12/26 and FY12/27 PC shipments decline to 164 ten-thousand units and 123 ten-thousand units, respectively, and whether an increase of more than 10% in average selling prices can continue to cushion the revenue decline.
• Monitor whether growth in the security and network businesses can offset business-mix pressure from increased low-margin equipment, software licensing, and maintenance services.