Casio Earnings: Concerns Over Sluggish Watch Sales and Restructuring Delays; Cut Valuation by 3%

We are disappointed with Casio Computer's results for the March quarter, which indicate that its marketing activities in the watch business were not as effective as expected and that its music instruments business posted another large loss. In response to the disappointing results, the company has announced that it will embark on a major restructuring program that will include reducing its workforce and revising its marketing strategy, and as a result, Casio’s margin expansion will be delayed by about a year from what we had previously assumed. Accordingly, we lower Casio’s operating margin assumptions for fiscal 2024 (ending March 2025) and fiscal 2025 from 8.8% and 9.9% to 6.0% and 8.2%, respectively, and lower our fair value estimate for Casio from JPY 1,500 to JPY 1,450. We acknowledge that Casio’s problems, such as a slower response to unprofitable businesses and a poor track record of investing in new businesses, have not been resolved, and it will take some time for the market to regain confidence. However, despite the continued challenging fundamentals, we believe the downside in Casio’s stock price is limited, supported by its dividend yield of 3.9%.