Maintain Buy but cut target price: the tight supply-demand theme remains intact, while rising costs compress the valuation premium

Overview

This report is a company research update by Goldman Sachs on Japan Steel Works (5631.T). The core conclusion is that although FY3/27 guidance indicates higher cost pressure in the Materials and Engineering business than previously expected, leading to cuts in earnings forecasts and target valuation premium, the structural supply-demand tightness, price improvement, and high barriers to entry in GTCC gas turbines and large critical nuclear components remain in place, so the Buy rating is maintained.

Core views

The report's core views include: first, Japan Steel Works has world-leading capacity in large specialty steel products with steel ingots of up to about 670 tons, and supplies gas turbine large shafts and nuclear primary system components to global OEMs; second, shipment volumes in this cycle may not exceed the peak around 2010, but unit price improvement is significant, and margins in the Materials and Engineering business are still expected to exceed historical peaks; third, rising costs in FY3/27 make near-term earnings lower than previously expected, but the logic that high-margin backlog will ultimately be recognized as revenue remains unchanged; fourth, ESS battery separator equipment and defense sales growth provide additional upside for the Industrial Machinery Products business.

Analysis framework

The report uses a combination of segment earnings forecast revisions and relative valuation: it first revises earnings for the Materials and Engineering business based on FY3/27 company guidance, fixed costs, labor costs, maintenance investment, and revenue recognition timing lags; then raises earnings for the Industrial Machinery Products business based on ESS wet-process separator equipment orders and defense demand; and finally calculates the target price using FY3/30E estimates and an EV/EBITDA multiple premium.

Methodology notes

• Valuation methodEV/EBITDA relative valuation

  Target price calculation

  Goldman Sachs uses FY3/30E estimates and sets the target EV/EBITDA multiple at a 10% premium to the Japanese aerospace and defense sub-sector average of 14X, then discounts it back to FY3/28E at a 10% cost of capital to derive a 12-month target price of ¥11,500.

• Earnings forecastSegment operating profit revision

  Downward revision for Materials and Engineering business, upward revision for Industrial Machinery Products business

  For the Materials and Engineering business, average operating profit forecasts for FY3/27-FY3/30 are reduced by 20% due to higher-than-expected fixed and labor costs; for the Industrial Machinery Products business, average operating profit forecasts for FY3/27-FY3/30 are raised by 13% due to growth in ESS separator equipment and defense sales.

• Research appendixGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite factors

  Goldman Sachs Factor Profile compares the stock with the market and industry peers across growth, financial returns, valuation multiples, and composite percentiles to provide investment context.

Asset mapping & comparison

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

• Japan Steel Works (5631.T)

  Research subject and rated security

  Strengths

  Has high technological barriers, a global customer base, and high supplier switching costs in GTCC gas turbine large shafts and large nuclear primary system components; benefits from expanding global power capex.

  Weaknesses

  FY3/27 guidance exposes pressure from fixed costs, labor costs, and maintenance investment, causing near-term Materials and Engineering business margins to fall below prior expectations.

  Comparison

  Shipment volume may not exceed the peak around 2010, but the report believes unit price improvement is more pronounced than in the previous cycle, and OPM in the Materials and Engineering business may still exceed historical peaks.

  Risks

  Production delays, fixed costs exceeding expectations due to large-scale capacity expansion, and declining profitability in the Industrial Machinery Products business.

• Materials and Engineering business

  Core earnings driver and source of valuation premium

  Strengths

  Supplies large specialty steel critical components for thermal power gas turbines and nuclear power, benefiting from global OEM backlog and improved order gross margins.

  Weaknesses

  FY3/27 operating profit and OPM guidance are clearly below Goldman Sachs' prior forecasts, and revenue recognition upon shipment creates timing lags in recognizing high-margin orders.

  Comparison

  Goldman Sachs still expects its FY3/29 estimate for this business to be about 45% above Bloomberg consensus, suggesting the market may not yet fully reflect the benefits of price improvement.

  Risks

  Further increases in fixed costs, maintenance investment above expectations, and delayed revenue recognition affecting near-term performance.

• Industrial Machinery Products business

  Source of upward earnings revision

  Strengths

  Demand for ESS battery wet-process separator manufacturing equipment is expanding, while defense-related sales are growing faster than expected and improving margins.

  Weaknesses

  The business is affected by EV and ESS battery capex cycles, and order demand may fluctuate.

  Comparison

  Segment operating profit forecasts for FY3/27-FY3/30 were raised by an average of 13%, offsetting part of the downward revision in the Materials and Engineering business.

  Risks

  ESS battery equipment demand misses expectations, defense order momentum slows, and profitability in the industrial machinery business declines.

Key data

• Report date2026-06-25 6:58AM JSTSource: report cover page.
• RatingBuyGoldman Sachs maintains a Buy rating.
• 12-month target price¥11,500Previous value was ¥13,000, reduced due to lower cost and valuation premium assumptions.
• Upside43.2%Disclosed on the report cover page.
• Adjustment to company operating profit forecastAverage cut of 5% for FY3/27-FY3/30Company-level impact after combining the downward revision in Materials and Engineering and the upward revision in Industrial Machinery Products.
• Materials and Engineering business FY3/27 guidanceOperating profit ¥9.5bn, OPM 16%Below Goldman Sachs' previous estimate of operating profit ¥16bn and OPM 27%.
• Materials and Engineering business forecast revisionAverage operating profit cut of 20% for FY3/27-FY3/30; FY3/30 OPM lowered from 40% to 34%Mainly reflects fixed costs such as maintenance investment and labor costs being higher than previously assumed.
• Industrial Machinery Products business forecast revisionAverage operating profit raised by 13% for FY3/27-FY3/30Reflects recovering demand for ESS-related film manufacturing equipment and faster-than-expected growth in defense-related sales.
• Plastic production and processing equipment order forecastAbout ¥90bn of orders in FY3/27The report says this forecast is above company guidance.
• Valuation premium assumptionEV/EBITDA premium cut from +20% to +10%Because the FY3/30 OPM assumption for the Materials and Engineering business was lowered from 40% to 34%.
• Key eventsJGP2028 mid-term plan update: 2026-07-07; business briefing: 2026-07-13The report highlights whether management guides for Materials and Engineering business margins above historical peaks as a key watch point.

Impact & implications

The investment implication is that near-term earnings forecasts and the target price have been cut due to cost pressure, but the report has not changed its view that Japan Steel Works is a structural medium- to long-term beneficiary. If prices for large gas turbines and nuclear components continue to improve, backlog converts smoothly into revenue, and incremental maintenance and labor costs remain controllable, the company may still deliver earnings above market consensus; however, valuation is already at a historical high, making the stock more sensitive to future management guidance and margin delivery.

Risks

• Production delays in the Materials and Engineering business.
• Fixed-cost burden exceeding assumptions due to capacity expansion or maintenance investment.
• Declining profitability in the Industrial Machinery Products business.
• High valuation makes the stock more sensitive to margin delivery, order execution, and management guidance.
• Revenue recognition upon shipment may create timing gaps in converting high-margin orders into revenue.

What to watch

• JGP2028 mid-term plan update on July 7, 2026.
• Management commentary on measures and margins for each business at the business briefing on July 13, 2026.
• Whether the Materials and Engineering business can exceed historical peak margins in this cycle.
• Whether price improvement in large gas turbine and nuclear components continues.
• Whether growth in ESS wet-process separator manufacturing equipment orders and defense-related sales is sustained.
• Whether fixed costs, maintenance investment, and labor costs continue to run above expectations.