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On Wednesday, Goldman Sachs upgraded shares of Rinnai Corporation, traded under the ticker 5947:JP on the Tokyo Stock Exchange and OTC: RINIF, from Neutral to Buy. The firm also increased the price target from JPY3,800.00 to JPY3,900.00. This adjustment comes after a detailed analysis of the company's valuation and performance prospects.
The upgrade was prompted by Rinnai's current price-to-earnings (P/E) ratio of 13.9, which is considered low within the historical five-year range for the stock. Goldman Sachs believes that the recent 5.7% drop in Rinnai's share price since November 7, 2024, presents a favorable buying opportunity. The company's shares had fallen after it announced that its operating profit (OP) guidance for the fiscal year ending March 2025 would remain unchanged.
Goldman Sachs analysts argue that Rinnai's fundamentals are strong and have not been fully reflected in the stock's price. They see a potential upside of over 22% with the new price target, compared to the sub-sector average return potential of 10%. This suggests a significant growth opportunity for investors.
The firm's optimistic outlook is further supported by the recovery in Rinnai's domestic water heater sales, which had previously declined by 7% year-over-year in FY3/24 due to inventory adjustments. However, shipment values of water heaters have since increased by 13% year-over-year from April to October 2024, according to statistics from Japan's Ministry of Economy, Trade and Industry (METI).
Additionally, Rinnai's position in the U.S. market has strengthened. Japanese manufacturers, including Rinnai, had lost market share in the tankless gas water heater export market to Korean manufacturers due to supply chain issues. These issues, which were primarily caused by the global semiconductor shortage, have since been resolved. As of October 2024, Japanese manufacturers have regained and surpassed the market share previously held by their Korean counterparts.
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