ERP disruption weighs on near-term earnings, but the order environment supports expectations for Yaskawa Electric's recovery

Overview

This report is Goldman Sachs' review following Yaskawa Electric's 1Q2/27 results. The report considers execution issues following the ERP implementation to be the primary reason for short-term earnings falling below expectations, but views the issue as largely limited to the company's internal operating processes. With additional personnel and operations normalizing, revenue recognition and supply operations are expected to improve in 2H FY2/27.

Core views

The core view is that short-term earnings are being weighed down by ERP-related execution issues, requiring a downward revision to the FY2/27 operating profit forecast. However, the order environment, particularly semiconductor-related FA demand, remains robust, and the order backlog is expected to drive mix improvement. Therefore, no further negative re-rating is necessary, and the Buy rating is maintained.

Analysis framework

The analysis focuses on the 1Q2/27 earnings miss, the nature of the ERP issues, the recovery pace across business segments, the order and demand environment, the quarterly path to operating profit recovery, the target price methodology, and downside risks. The report distinguishes between internal execution disruptions and external demand changes, and accordingly judges that valuation credibility should gradually recover.

Methodology notes

• Valuation methodsEV/EBITDA

  12-month target price methodology

  The ¥9,000 target price is based on FY2/28E EV/EBITDA, using an industry-average multiple of 10X and applying a 90% premium relative to the industry.

• Factor analysisGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factors

  Goldman Sachs compares the stock with the broader market and industry peers based on growth, financial returns, valuation multiples, and composite percentiles.

• M&A assessmentM&A Rank

  M&A Rank 3

  The company's disclosed M&A Rank is 3, indicating a relatively low probability of becoming an acquisition target and generally not being included in the target price.

Asset mapping & comparison

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

• Yaskawa Electric (6506.T)

  Covered company and investment target

  Strengths

  Favorable order environment, strong semiconductor-related demand, relatively rapid recovery in the MC business, and largely unchanged FY2/28 profit forecast.

  Weaknesses

  Execution issues following the ERP implementation disrupted revenue recognition, shipping, and production timing, resulting in lower FY2/27 earnings expectations.

  Comparison

  The report considers the current issues to be primarily internal execution disruptions rather than external demand deterioration; Buy is maintained within the covered peer universe.

  Risks

  ERP issues lasting longer than expected, slower recovery due to the longer supply chain in the robotics business, and a slowdown in semiconductor and AI Capex.

Key data

• 12-month target price¥9,000Lowered from ¥9,200 previously.
• Current price¥5,972Price disclosed in the report.
• Potential upside50.7%Based on the target price and current price.
• FY2/27 operating profit forecast¥64.0bnLowered from ¥73.0bn previously, mainly reflecting the 1Q shortfall and some issues extending into 2Q.
• FY2/28 operating profit forecast¥90.0bnThe report states that FY2/28 and subsequent forecasts are broadly unchanged.
• FY2/27 quarterly operating profit forecast2Q ¥15.0bn; 3Q ¥18.0bn; 4Q ¥22.5bnExpected to improve significantly sequentially before year-end.
• FY2/27 revenue forecast¥590.0bnGS Forecast.
• FY2/27 EPS forecast¥194.7Lowered from ¥220.9 previously.

Impact & implications

If ERP execution issues normalize as expected in 2H FY2/27, the market may refocus on the recovery of semiconductor and FA demand, the order backlog, and margin recovery, allowing valuation credibility to gradually recover. In the near term, the key factors are the pace of production and shipping recovery and whether the company can avoid damaging customer confidence.

Risks

• A slowdown in semiconductor- and AI Capex-related businesses.
• Cost optimization measures taking longer than expected to produce results.
• Market disappointment with the capital policy and growth strategy in the next medium-term plan and long-term vision.
• If ERP-related execution issues persist for too long, customer confidence could weaken.
• Due to its longer supply chain, the robotics business may experience issues for longer than the MC business.

What to watch

• Whether revenue recognition, production, and shipping operations normalize in 2H FY2/27.
• Whether AC servo motors return to normal around August and whether the MC business's two-shift system drives rapid improvement.
• Changes in the supply chain and delivery times for the robotics and semiconductor robotics businesses.
• Whether order trends continue to indicate resilience in FA and semiconductor demand.
• The frequency of subsequent management communications and progress in resolving the issues.
• Whether FY2/27 2Q, 3Q, and 4Q operating profit approaches the sequential improvement path of ¥15.0bn, ¥18.0bn, and ¥22.5bn.