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On Wednesday, Goldman Sachs analyst Chikai Tanaka adjusted the firm’s stance on Otsuka Corporation (4768:JP) (OTC: OSUKF), downgrading the stock from Neutral to Sell and reducing the price target from JPY3,780.00 to JPY3,110.00. The revision follows an evaluation of Otsuka’s fourth-quarter results and fiscal year 2024 performance.
Tanaka’s assessment included an update to the fiscal year 2025 and 2026 estimates, taking into account the latest company earnings. The valuation base year was shifted forward to fiscal year 2026 estimates from the previous fiscal year 2025 estimates. The price-to-earnings (P/E) multiple target for fiscal year 2026 is set at 21X, reflecting the sector average, a change from the former target P/E of 24X applied to fiscal year 2025 profit estimates. This alteration signifies a removal of the premium previously set at 15% above the sector, now adjusted to 0%.
The downgrade to a Sell rating is influenced by the projection of a year-over-year decline in operating profits for fiscal year 2026. The anticipated decrease is attributed to an expected reduction in personal computer (PC) upgrade demand. According to Tanaka, the market is likely to shift its focus to the impending downturn in demand, which could result in lower P/E levels and a reduction in the premium compared to the sector average, following historical PC sales cycles.
For a more positive outlook on Otsuka’s stock, Tanaka suggests that evidence of sustained growth in sales per employee, coupled with profitability enhancements through sales efficiency improvements and price increases, would be necessary. Although strong earnings are expected to continue in the short term due to the current PC upgrade cycle, strategies to mitigate the impact of diminishing demand in fiscal year 2026 will be closely monitored.
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