Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Equity Bottom-Up

Topcon is a Japanese manufacturer of precision optical instruments used in civil engineering (surveying, 3D laser scanning &amp; mapping), positioning (GNSS receivers, machine control, precision agriculture) and eye care (opthalmic &amp; refraction instruments). It has also invested in and tied-up with several companies and research institutes in order to incorporate software, data analytics, mobile connectivity and cloud services into its business model, which should enable it to ride the wave of the Fourth Industrial Revolution rather than being left behind as a low margin supplier of basic hardware. It stands to benefit from rising demand for IT-enhanced infrastructure construction and agriculture, and the growing need for early identification and treatment of eye diseases in an aging population.After retreating from record profits in FY Mar-15,  year-on-year sales and profit comparisons turned positive in the three months to Dec-16 as a result of a weaker JPY, strong sales growth in Japan and North America, and a turnaround in the profitability of the Positioning business. This recovery should continue, in our estimation, supported by fiscal expansion in the U.S. and Japan, and rising demand for IT-driven efficiencies. Exposure to economic problems in China is limited (6% of sales); sales in India and the rest of Asia are growing. For the three years to Mar-19, we are forecasting a 65% increase in operating profit. In the context of the company's historical and current market valuations, that suggests 32% potential upside to a medium-term price target of JPY2,600.Risks to our forecast and to investors include the strong likelihood of further acquisitions, the cost and result of which are unknown, and the possibility of significant changes in exchange rates. In addition, after doubling over the past six months, the shares may be headed into a trading range. Considering the projected valuations, we would prefer to buy on weakness while the sustainability of the earnings recovery is being established.

Topcon is a Japanese manufacturer of precision optical instruments used in civil engineering (surveying, 3D laser scanning &amp; mapping), positioning (GNSS receivers, machine control, precision agriculture) and eye care (opthalmic &amp; refraction instruments). It has also invested in and tied-up with several companies and research institutes in order to incorporate software, data analytics, mobile connectivity and cloud services into its business model, which should enable it to ride the wave of the Fourth Industrial Revolution rather than being left behind as a low margin supplier of basic hardware. It stands to benefit from rising demand for IT-enhanced infrastructure construction and agriculture, and the growing need for early identification and treatment of eye diseases in an aging population.After retreating from record profits in FY Mar-15,  year-on-year sales and profit comparisons turned positive in the three months to Dec-16 as a result of a weaker JPY, strong sales growth in Japan and North America, and a turnaround in the profitability of the Positioning business. This recovery should continue, in our estimation, supported by fiscal expansion in the U.S. and Japan, and rising demand for IT-driven efficiencies. Exposure to economic problems in China is limited (6% of sales); sales in India and the rest of Asia are growing. For the three years to Mar-19, we are forecasting a 65% increase in operating profit. In the context of the company's historical and current market valuations, that suggests 32% potential upside to a medium-term price target of JPY2,600.Risks to our forecast and to investors include the strong likelihood of further acquisitions, the cost and result of which are unknown, and the possibility of significant changes in exchange rates. In addition, after doubling over the past six months, the shares may be headed into a trading range. Considering the projected valuations, we would prefer to buy on weakness while the sustainability of the earnings recovery is being established.

Topcon (7732 JP): Ready for the Fourth Industrial Revolution

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Equity Capital Markets

Toshiba plans to raise US$475m through a sale of its 30% stake in Topcon.The deal scores well on our framework and we would be inclined to take it, given: 1) The deal seems well anticipated, as evidenced by the share price holding up well post the deal announcement; 2) The company has demonstrated a good track record over the past few years and remains on track to meet its mid-term targets; 3) Valuation remains reasonable, given the growth outlook, and analysts continue to be bullish; 4) The deal will lead to an increase in index weightage on the date of deal completion and hence, should benefit from index related flows.Apart from weak markets, the main risks remains in the markets ability to digest the large stake sale and the deal structure itself which is skewed towards retail investors, despite their relatively low percentage holding.

Toshiba plans to raise US$475m through a sale of its 30% stake in Topcon.The deal scores well on our framework and we would be inclined to take it, given: 1) The deal seems well anticipated, as evidenced by the share price holding up well post the deal announcement; 2) The company has demonstrated a good track record over the past few years and remains on track to meet its mid-term targets; 3) Valuation remains reasonable, given the growth outlook, and analysts continue to be bullish; 4) The deal will lead to an increase in index weightage on the date of deal completion and hence, should benefit from index related flows.Apart from weak markets, the main risks remains in the markets ability to digest the large stake sale and the deal structure itself which is skewed towards retail investors, despite their relatively low percentage holding.

Well positioned with good track record and valuation, although high retail split could spell trouble

Japan

Topcorn Corporation manufactures and sells measuring equipment and medical equipment primarily for ophthalmologist use. The Company also manufactures industrial products including projectors and optical devices.

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Topcon Corp (7732 JP)

Topcon (7732 JP): Ready for the Fourth Industrial Revolution

Topcon is a Japanese manufacturer of precision optical instruments used in civil engineering (surveying, 3D laser scanning & mapping),...

Scott Foster

Well positioned with good track record and valuation, although high retail split could spell trouble

Toshiba plans to raise US$475m through a sale of its 30% stake in Topcon.The deal scores well on our framework and we would be inclined to take it,...

Sumeet Singh

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