Structural Reforms And Renovation Demand Will Strengthen Future Market Position

Key Takeaways

• Demand shift from new construction to renovation in Japan may enhance revenue stability due to predictability and profitability of projects.
  
• Product innovation and sustainability focus, alongside government incentives in Japan, could drive revenue growth, boosting market share and margins.
  
• LIXIL faces multiple risks including U.S. market stagnation, increased tax expenses, execution risks in reforms, and global market volatility affecting revenue and profitability.

Catalysts

Through its subsidiaries, operates water technology and housing technology business in Japan and internationally.

• The shift from new housing construction to renovation demand in Japan has increased the renovation ratio from 30% to 47%, which could lead to more stable revenue growth and improved margins due to better demand predictability and profitability from renovation projects.
  
• Ongoing structural reforms in Europe are starting to yield positive impacts, and similar reforms are targeted for completion in the U.S. by the end of the fiscal year. This is expected to result in improved margins and profitability, particularly in the U.S. market, from the next fiscal year onward.
  
• The launch of innovative and differentiated products, like PremiAL and Revia, along with a focus on sustainability, could boost sales and market share, enhancing revenue and gross margins due to premium pricing.
  
• Anticipated government subsidies in Japan for insulation improvements until 2030 could drive demand for renovation products, providing an additional revenue stream and improving profitability through increased sales volume.
  
• Improved free cash flow, up by ¥46.1 billion year-on-year and close to ¥100 billion, suggests potential for strategic investments or debt reduction, which could lead to better financial leverage and higher earnings per share (EPS) in the future.

LIXIL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LIXIL's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 2.2% in 3 years time.
• Analysts expect earnings to reach ¥35.7 billion (and earnings per share of ¥124.21) by about March 2028, up from ¥-16.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥22.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, up from -32.2x today. This future PE is greater than the current PE for the JP Building industry at 11.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.14%, as per the Simply Wall St company report.

LIXIL Future Earnings Per Share Growth

Risks

• The U.S. market is struggling due to stagnating demand, which has negatively impacted revenue and profit, particularly after an unauthorized security breach in December that affected shipments. This poses ongoing risks to future earnings and profitability.
  
• Increased tax expenses and the inability to utilize deferred tax assets, particularly in the U.S., are affecting net margins and the overall profit outlook. Without an improvement in U.S. profitability, this situation is expected to continue.
  
• The company faces execution risks in its structural reforms, particularly in the U.S., with impact expected mainly in fiscal year 2026. Any delay or failure in these reforms could negatively impact margins and earnings.
  
• LHT's reliance on new housing starts in Japan, which are declining, presents a risk to revenue growth. Although the company is working on increasing its renovation ratio, this market's volatility could impact net margins and revenue consistency.
  
• Global market volatility, including the uncertain impact of U.S. tariffs and weak demand in Europe and China, poses risks to revenue and profit stability, possibly affecting future earnings.

Valuation

• The analysts have a consensus price target of ¥1862.222 for LIXIL 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 ¥2300.0, and the most bearish reporting a price target of just ¥1700.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1613.2 billion, earnings will come to ¥35.7 billion, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of ¥1800.5, the analyst price target of ¥1862.22 is 3.3% 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.