Kurita Water Industries (6370.T): Our thinking about the sharp share price decline after guidance was cut

Kurita's stock closed limit-down for two straight business days following the downward revisions announced after the market close on October 29, leaving the shares down about 35% from the October 29 close. We believe the investor reaction is excessive. The market appears to have already priced in the risk that Kurita will recognize losses on other US projects as well. While we estimate the order to be around ¥20bn in size, Kurita has now recognized ¥23.6bn in additional costs, suggesting considerable risk has been priced in. We regard the risk of loss recognition on domestic projects as quite low. Kurita's historical PER since 2012 has ranged from 11x to 28x on a forward-FY basis; applying 11x to our forward-FY EPS forecast gives a theoretical stock price of c¥5,500. Forward-FY profit forecasts may be revised down slightly (we think by less than 10%), but the impact on the business outlook from FY3/28 onward would be limited absent spillover. Over half of earnings are based on high-mar