Keyence Corporation: Multiple Positives (OTCMKTS:KYCCF)

Elevator Pitch

I assign a Buy investment rating to Keyence Corporation’s (OTCPK:KYCCF) [6861:JP] shares.

Keyence recently released its recent quarterly earnings, and a number of disclosures was pretty favorable in my opinion. KYCCF achieved robust sales growth in the European market which is experiencing significant economic pressure. The company also showed that it had the ability to pass on cost increases to its clients by disclosing plans for price increases. Furthermore, Keyence announced that it expects to increase the company’s dividends by +50% for the current fiscal year. Considering these multiple positives, I believe that Keyence is deserving of a Buy rating.

Company Description

On the company’s corporate website, Keyence describes itself as “a leading supplier of sensors, measuring systems, laser markers, microscopes, and machine vision systems worldwide.”

As revealed in KYCCF’s FY 2022 (YE March 31) annual report, the company earned 41% of its revenue for its most recent fiscal year from its home market, Japan, with foreign markets contributing the other 59% of its sales. Specifically, China and the US are Keyence’s key non-Japanese markets, representing 17% and 15% of its FY 2022 top line, respectively.

Q2 FY 2023 Was A Great Quarter For KYCCF

Keyence reported the company’s financial results for the second quarter of fiscal 2023 in late October.

Revenue for KYCCF expanded by an impressive +25% YoY to JPY444,000 million in Q2 FY 2023, and this was +5% higher than the sell-side analysts’ consensus estimate according to S&P Capital IQ data. Keyence’s EBIT grew by +33% YoY to JPY138,670 million, which turned to be +13% better than what the analysts have previously forecasted.

Specifically, it is worth noting that Keyence was able to deliver excellent operating profit margins in spite of inflationary cost pressures. Keyence’s EBIT margin widened by +150 basis points QoQ from 53.5% in Q1 FY 2023 to 55.0% for Q2 FY 2023. The second quarter of fiscal 2023 also marked the ninth consecutive quarter that KYCCF managed to deliver a quarterly EBIT margin in excess of 50%.

Future Profitability To Be Supported By Price Increases

The sell-side analysts have a positive view of Keyence’s future profitability as seen with the consensus numbers for the company. Based on financial data sourced from S&P Capital IQ, Keyence is expected to achieve EBIT margins of 54.5%, 55.0%, 54.8%, and 56.0% for Q3 FY 2023, Q4 FY 2023, Q1 FY 2024, and Q2 FY 2024, respectively. The analysts’ EBIT margin projections are comparable with the actual EBIT margin that KYCCF achieved for the recent quarter (55.0%).

Keyence has disclosed plans to increase the selling prices of its products by between +10% and +35% going forward, as highlighted in a recent October 31, 2022 Bloomberg article. The price increases should allow KYCCF to maintain a reasonably a high level of profitability in the quarters ahead, and this is indicative of the company’s pricing power.

More Recession Resistant Than Expected

KYCCF’s revenue from Europe grew by +28% YoY on constant-currency terms in the second quarter of the current fiscal year. Considering Europe’s economic woes, the market wasn’t expecting Keyence to achieve such strong top line growth from the European region.

This suggests that Keyence might turn out to be much more defensive in an environment of slowing economic growth or even a recession than what one would expect.

One of Keyence’s institutional investors is Hennessy Funds which noted in a May 2022 write-up that the company “has historically been more resilient during economic downturns due to its strong understanding of its customer base and its quick response to fluctuations in demand.” This could help to explain why Keyence has been able to deliver positive top line expansion for the company as a whole and for challenging markets like Europe as well.

FY 2023 Dividend Guidance Was A Positive Surprise

In tandem with its recent Q2 FY 2023 earnings announcement, Keyence provided its dividend guidance for full-year fiscal 2023.

It came as a positive surprise that Keyence guided for a +50% increase in its total dividend payout from JPY200 per share in FY 2022 to JPY300 per share for FY 2023.

Japanese companies in general have a reputation for hoarding cash, and they tend to be less enthusiastic about returning a larger proportion of their excess capital to shareholders. Notably, Keyence also didn’t raise its dividend in FY 2022, choosing to pay out the same amount of dividends (JPY200 per share) as it did for FY 2021.

Concluding Thoughts

Keyence’s shares are rated as a Buy.

I am positive on the company’s planned price hikes and dividend increase. The company’s excellent revenue growth in a tough market such as Europe was also encouraging, as this implies that KYCCF’s sales and earnings might hold up well even in recessionary economic conditions.

Keyence’s valuations are also reasonably attractive as compared to history. The market currently values Keyence at consensus forward FY 2023 and FY 2024 P/E multiples of 39.3 times and 37.3 times, as per S&P Capital IQ’s valuation data. In contrast, Keyence’s five-year mean forward P/E was much higher at 49.1 times.