Perovskite Solar Cells And Medical Business Expansion Ignite Profit Growth Potential

Key Takeaways

• Strong focus on High Performance Plastics and solar technologies may significantly boost future revenue, aided by strategic investments and government support.
  
• International expansion in Medical business and innovative initiatives in Housing could drive profitability despite domestic market challenges.
  
• Vulnerability to adverse economic conditions and cost pressures might negatively impact Sekisui Chemical's revenue, operating profit, and international market profitability amidst weak housing demand.

Catalysts

Engages in the housing, urban infrastructure and environmental products, high performance plastics, and medical businesses.

• Sekisui Chemical's focus on the High Performance Plastics segment, including investing in new production capacities and product lines, is expected to drive significant revenue and operating profit growth, particularly by improving the sales volume and product mix.
  
• The development and commercialization of Perovskite Solar Cells, backed by support from the Japanese government, could be a major growth catalyst, potentially enhancing future revenue streams and operating margins by FY 2025.
  
• Strategic measures to enhance profitability in the Housing business through improved product mix, cost reduction, and expansion of Stock and Town & Community Development initiatives are anticipated to boost operating income despite stagnant housing sales.
  
• Expansion in the Medical business, particularly the sales of infectious disease testing kits in international markets, along with new API sales, is projected to result in record operating profits, significantly impacting earnings.
  
• The Urban Infrastructure and Environmental Products segment's focus on nonresidential market sales and overseas expansion, particularly in the prioritized growth products, aims to maintain strong sales and profit margins in response to domestic housing market challenges.

Sekisui Chemical Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sekisui Chemical's revenue will grow by 4.6% annually over the next 3 years.
• Analysts are assuming Sekisui Chemical's profit margins will remain the same at 6.0% over the next 3 years.
• Analysts expect earnings to reach ¥86.7 billion (and earnings per share of ¥207.06) by about December 2027, up from ¥76.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2027 earnings, up from 13.1x today. This future PE is greater than the current PE for the JP Industrials industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.08%, as per the Simply Wall St company report.

Sekisui Chemical Future Earnings Per Share Growth

Risks

• The domestic housing market remains stagnant, with a projected low demand for new housing starts. This could continue to impact net sales in the Housing segment negatively.
  
• The significant reliance on positive market conditions in the nonresidential and global sectors for growth indicates vulnerability to adverse economic conditions, which could affect overall revenue and operating profit stability.
  
• The FX rate assumptions and potential yen appreciation pose risks to future operating margins and earnings, as a stronger yen could negatively impact the profitability of international sales.
  
• Despite achieving profitability, the company faces increased fixed costs, particularly from investments in human resources and R&D, which could squeeze net margins if revenue growth does not match these cost increases.
  
• The international markets for certain products, such as pipeline materials, face challenges due to weaker capital expenditure demand in regions like China and South Korea, potentially impacting overall revenue and profit growth.

Valuation

• The analysts have a consensus price target of ¥2526.67 for Sekisui Chemical based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥1456.5 billion, earnings will come to ¥86.7 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 5.1%.
• Given the current share price of ¥2391.0, the analyst's price target of ¥2526.67 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.