KYCCF - Keyence Corporation: Favorable Performance And Outlook

2023-05-01 11:13:08 ET

Summary

• Both Keyence's revenue and bottom line grew strongly in the recent fiscal year, and the company's financial performance was largely in line with analysts' expectations.
• Keyence raised the company's dividend distribution by +50% for FY 2023, and it expects to pay out a similar level of dividend for FY 2024.
• Keyence's outlook is favorable, considering that its biggest international market, China, is exhibiting signs of robust economic recovery.
• I continue to rate Keyence as a Buy, in view of its favorable financial performance and business outlook.

Elevator Pitch

My investment rating for Keyence Corporation's ( KYCCF ) (6861:JP) shares stays as a Buy.

With my prior update for KYCCF published on January 16, 2023, I wrote about Keyence Corporation's long-term growth and profitability outlook. My attention turns to Keyence's most recent full year fiscal 2023 (YE March 30) financial results and shareholder capital return.

I am positive on Keyence's substantial dividend hike and strong earnings growth for FY 2023. Moving ahead, there are both short-term and long-term growth drivers in place for Keyence, so I don't see any reason to change my bullish view and Buy rating for the stock.

Readers should note that Keyence's shares are tradable on both the OTC market and the Tokyo Stock Exchange. The three-month mean daily trading value for Keyence's OTC shares with the KYCCF ticker is reasonably good at around $1.5 million (source: S&P Capital IQ ), while Keyence's Japan-listed shares with the 6861:JP are even more liquid boasting an average daily trading value of more than $200 million for the last three months. There are many US stock brokerages providing trading access for the Tokyo Stock Exchange such as Interactive Brokers.

Keyence's Recent Fiscal Year Results Came In Within Expectations

Keyence revealed the company's FY 2023 financial performance last week on April 27, 2023. The company delivered strong topline and bottom line growth in the most recent fiscal year, which met the market's expectations.

Revenue for Keyence expanded by +22.1% from JPY755.2 billion in FY 2022 to JPY922.4 billion for FY 2023, while the company's net income attributable to shareholders grew by +19.6% from JPY303.4 billion to JPY363.0 billion in the same time frame. Keyence's FY 2023 topline turned out to be +0.6% above the analysts' consensus sales forecast of JPY916.3 billion (source: S&P Capital IQ ), and its net profit for the previous year was marginally or -0.4% lower than the sell-side's consensus bottom line estimate of JPY364.3 billion.

In my earlier November 2, 2022 initiation article for Keyence, I had highlighted that the company was "more recession resistant than expected" and noted my expectations that its "future profitability" will be "supported by price increases." Keyence's excellent full-year FY 2023 results as discussed above indicate that I was most probably right about the company's topline resilience and pricing power.

Keyence's Dividend Hike And Guidance Send Positive Signals

The company hiked its dividend distribution by a substantial +50% from JPY200 per share for FY 2022 to JPY300 per share in FY 2023. During the same period, Keyence also raised its dividend payout ratio from 16% to 20%.

Looking forward, Keyence guided for maintaining its dividend per share payment at JPY300 for FY 2024. The sell-side analysts covering Keyence's stock are slightly more optimistic, as the consensus points to a +3.5% growth in dividend distribution for Keyence to JPY310 per share. In other words, it is reasonable to expect stable (or even growing) dividends for KYCCF in the new fiscal year.

There are two key positive takeaways from Keyence's actual dividend distribution for FY 2023 and its FY 2024 dividend guidance.

Firstly, the increase in dividend payout ratio in FY 2023 suggests that Keyence has the intention to return a larger percentage of its excess capital to the company's shareholders. This is a positive indicator from the perspective of capital allocation (balance between capital investment and capital return) and corporate governance (shareholder-centric).

Secondly, Keyence has signaled that the company is confident about its growth prospects in FY 2024 with its guidance of paying out the same level of dividends as FY 2023. This suggests that Keyence's favorable financial performance in FY 2023 and dividend hike in the recent fiscal year were driven by solid business fundamentals rather than one-off factors.

China's Economic Recovery Is Expected To Be A Major Boost For Keyence

China is Keyence's largest foreign market, which contributed about 17% of the company's sales in FY 2022. Note that Keyence's FY 2023 annual report detailing its geographic sales breakdown has yet to be released. Separately, an earlier February 2, 2019 Nikkei Asia news article mentioned that Keyence was a beneficiary of "Chinese automation demand" relating to "small- to medium-scale factory upgrades" in China.

It is fair to say that Keyence's financial performance should be positively correlated with economic growth in China, so recent economic indicators have positive read-throughs for KYCCF. The consensus 2023 GDP growth forecast for China went up from 4.7% in the final month of 2022 to 5.4% in March 2023 based on Nikkei's poll of Chinese economists . A recent April 18, 2023 Seeking Alpha News article highlighted that "China's industrial production increased by 3.9%" YoY in March this year, which was the highest rate of growth in the past five months.

I previously noted in my January 16 article on Keyence that I expect the company's revenue growth to accelerate from the single-digit percentage for the FY 2017-2019 period to the low-teens percentage in the intermediate term. In that article, I cited various economic and industrial automation industry forecasts from McKinsey, Allied Market Research, and Precedence Research as support for my bullish views.

In summary, I view the faster-than-expected economic growth for China as a short-term growth driver for Keyence. In the mid to long term, Keyence is very likely going to witness accelerated growth thanks to rising demand for industrial automation.

Concluding Thoughts

Keyence's recently released FY 2023 financial results reinforce my positive view of the company, taking into account favorable metrics like topline expansion, bottom line growth, and a dividend hike. As such, I am sticking with my Buy rating for Keyence.

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