Tactical Acquisitions And Agribusiness Expansion Boost Profits And Enhance Shareholder Value

Key Takeaways

• Strategic expansion in Energy Solutions and Healthcare aims to enhance revenue, with a focus on acquisitions and decarbonization efforts.
  
• Commitments to shareholder returns, including dividends and buybacks, are expected to boost investor confidence and elevate earnings per share.
  
• Declining market prices, slow fiscal progress, and inefficient cash flow management could negatively impact Sojitz's revenue, margins, and investor confidence.

Catalysts

Operates as a general trading company that engages in various business activities worldwide.

• The company is focusing on expanding its Energy Solutions and Healthcare divisions, with acquisitions like McClure and Freestate Electric in the US, and Ellis Air Group in Australia. This strategic expansion aims to capitalize on growing energy demands and decarbonization efforts, potentially increasing revenue through both organic growth and M&A.
  
• The transformation of the fertilizer business into a broader agricultural platform in Southeast Asia, especially with the support of digital and financial services in Thailand, is expected to enhance revenue and net margins by transitioning from a sales-based to a holistic agribusiness model.
  
• Share repurchases and a target of maintaining a price-to-book ratio of consistently over 1x demonstrate a commitment to improving corporate value, potentially driving earnings per share (EPS) growth through returns to shareholders and enhanced equity value.
  
• The company plans to allocate approximately 30% of its core operating cash flow over a three-year period towards shareholder returns, including dividends and share buybacks, which could boost investor confidence and contribute to higher EPS.
  
• By implementing the Medium-term Management Plan to achieve new investments with a 4% average ROI and establishing competitive business bases, Sojitz aims to enhance profitability and increase net margins through strategic efforts in strengthening its business foundation and creating value.

Sojitz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sojitz's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 4.5% in 3 years time.
• Analysts expect earnings to reach ¥120.0 billion (and earnings per share of ¥572.44) by about December 2027, up from ¥97.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥139.0 billion in earnings, and the most bearish expecting ¥107.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2027 earnings, up from 6.8x today. This future PE is lower than the current PE for the JP Trade Distributors industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.43%, as per the Simply Wall St company report.

Sojitz Future Earnings Per Share Growth

Risks

• The decline in market prices for coking coal and challenges in improving production costs in the Metals, Mineral Resources, and Recycling segment have led to a downward revision of the fiscal year '24 forecast, which could negatively impact future revenues and net margins.
  
• The slow progress in the first half of fiscal '24, as described by management, indicates potential difficulties in meeting full-year profit forecasts, which could affect investor confidence and earnings stability.
  
• The negative operating cash flow of ¥55.2 billion, despite an increase in core operating cash flow, signals potential liquidity issues or inefficient working capital management that could impact future profitability and cash availability.
  
• The delay in improvement of the used car sales business in Australia and reduced sales volumes in the Americas and the Automotive segment suggest potential challenges in revenue growth and profit margin recovery in these areas.
  
• SG&A expenses have increased due to acquisitions and exchange rate impacts, potentially pressuring net margins if revenue growth does not outpace these rising costs.

Valuation

• The analysts have a consensus price target of ¥3682.5 for Sojitz based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4700.0, and the most bearish reporting a price target of just ¥3330.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥2672.1 billion, earnings will come to ¥120.0 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of ¥3084.0, the analyst's price target of ¥3682.5 is 16.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.