POSTED BY ANGUS GEDDES
In Australia, the recent rally took a pause on Monday with the ASX200 ending the session down 13 points at 5894. The banks were mostly weaker after ANZ settled its rate-rigging case with ASIC, with others likely to follow suit. Fairfax Media though had another strong session, rising 3.3% to $1.09. Fairfax is a top 10 holding in the Fat Prophets Global Contrarian Fund and is held in the Australian Managed Account Portfolios. As I wrote yesterday, the penny is probably starting to drop, with a re-rating catalyst on the horizon when Domain is partially demerged next month.
Fairfax has pushed back above trend channel resistance. We hold the view that the previous highs around $1.30 will soon be challenged with the demerger of Domain that will unlock value for shareholders.
The Robotic Revolution
In what was a solid day for Japanese equities on the news of Shinzo Abe’s landslide victory in the general election, robotics-related names were among the bigger risers. Yaskawa Electric shares gained 2.8%, Fanuc some 2.3% and THK Co shares were up 2.0%.
As exporters, the company’s will all have got a minor boost from the yen falling yesterday, but there are strong long-term trends at play as well and all three stocks have performed strongly year-to-date. We hold Fanuc in the Fat Prophets Global Contrarian Fund, along with in the Global Opportunities and Asian Managed Account Portfolios. Yaskawa Electric is also a core holding in the Asian Managed Account portfolio.
The Financial Times yesterday ran an in-depth article on running shoe giant Nike’s push to automate its supply chain further. Nike and its peers are huge employers so stand to benefit massively from cost savings on labour, especially as labour costs rise. The Financial Times article cited Nike as having 493,000 line workers in 15 countries that are involved in making Nike footwear. For all the company’s products, its contracted factories have approximately one million workers across 42 countries.
Besides potential labour cost savings, other benefits of automation and robotics include faster speed to market for products, quality stability, safety (i.e. reducing human exposure to high-risk work) and making things that cannot be processed manually, which is an increasing range of products.
In the case of Japan, where the employment market is extremely tight robots are filling a void when company’s struggle to hire enough workers as well.
Both the broader automation market and robotics are set to grow at a decent pace. Technavio Research estimated last year that the broader Global Industrial Automation Control market will grow at a compound annual growth rate (CAGR) of close to 8% from 2016 through 2020. This is a more mature market – where Fanuc is a leader via its Computerized Numerical Control (CNC) and servo motors.
Industrial robotics demand – the area where Fanuc’s excels – is anticipated to be robust, with a 13% compound annual growth rate (CAGR) from 2017 to 2019.
Fanuc currently has monthly robot production capacity of 5,000 units and this is set to expand to 7,000 by year end. The new plant (due to open August 2018) will initially add another 2,000 units of capacity, with a blueprint to add another 4,000 over time. Fanuc management expect the Chinese market to grow at above average rates for another 5-10 years, by which time the Indian market should be stepping into its shoes.
In a recent Bloomberg Business spotlight article on Fanuc, the Bloomberg writer Joshua Hunt wrote “Fanuc, a secretive Japanese factory-automation business, might be the planet’s most important manufacturer.”
Fanuc is due to report its second quarter numbers later this week, and reported a solid set of fiscal first quarter numbers earlier in the year. For the three months ended 30 June, the company recorded sales of ¥168.5 billion, representing 32.1% year-on-year growth. The Robo-machine business (used in the smartphone industry) rebounded strongly, with sales of ¥44.5 billion compared to ¥26.5 billion in the year ago quarter. All other segments including factory automation and robotics all posted solid gains as well. By region, Asia was the bright spot.
Although there was some modest compression in the operating margin, operating income still advanced 20.6% from a year ago to ¥50.5 billion and net income was up 35% to ¥40.8 billion. The company raised its half year and full year guidance, but even so we view the current guidance as conservative. Fanuc is known for issuing conservative guidance and we believe the company has done so again with very cautious foreign exchange assumptions.
Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in Fairfax and Fanuc.