Rather than any profit-based metric, given the inherent volatility of earnings and the over-capitalised balance sheet, we set our ¥1,400 target price with reference to Amada's PBR. Over the past five years this ratio has averaged c0.8x. We set our target price on a FY3/26E PBR of 0.8x. In addition to RoE projections, we also consider prospects for the bottoming out and recovery of the order cycle, and the firm’s increasingly active shareholder returns (share buybacks). Our target price of ¥1,400 corresponds to a FY3/26E PER of c12x with a dividend yield of 4%.

Downside risks to our target price include: a global manufacturing recession; a reduction in the Japanese government's various subsidy schemes to promote equipment purchases by local SMEs; yen strength (particularly against the euro) hurting price competitiveness relative to competitors in Europe; weaker-than-expected growth of demand for fiber lasers in Japan, North America, and other markets; and more aggressive discounting by Chinese OEMs in global markets. On the upside, any additional share buyback announcements could boost the shares, as could higher-than-expected spending on hardware and IoT by SMEs in Japan. Yen appreciation could also lift the shares. If these or other factors manifest themselves to a greater extent than we have anticipated, the share price may differ from our target price.