Reviving Potential And Evolving Excellence Will Drive Future Success By FY 2027

Key Takeaways

• The midterm plan focusing on profitability, smart motion control, and diversification aims to boost revenue, operating margins, and earnings growth.
  
• Enhancing shareholder returns via stable dividends and possible buybacks is expected to increase earnings per share and shareholder value.
  
• Over-reliance on the underperforming CMP business impacts profitability, with future revenue at risk if diversification into smart motion control and electrification fails.

Catalysts

Manufactures and sells equipment in the industrial, daily life, and environmental fields products in Japan and internationally.

• The new midterm plan from FY 2025 to '27, focusing on Reviving Potential and Evolving Excellence, aims to enhance profitability through Project 10, with targets for increased revenue and operating margins across Nabtesco's business segments. This is expected to improve overall earnings and profitability.
  
• The introduction of the smart motion control concept, driven by Electrification, Integration, and Data Solutions, aims to add more value to Nabtesco's products and increase systemization, which could lead to increased revenue and higher net margins.
  
• Nabtesco's strategy to diversify profits beyond its previous reliance on CMP (Component Solutions) by strengthening TRS (Transport Solutions) and ACB (Accessibility Solutions) is expected to contribute significantly to revenue growth and an improvement in net earnings by FY 2027.
  
• The plan to achieve a 10% ROIC by FY 2027 and enhance shareholder returns through stable dividends and potential share buybacks is expected to positively impact earnings per share (EPS) and shareholder value.
  
• Project 10's success in exceeding original operating profit margin expectations in key segments implies potential for substantial profit improvements, suggesting a favorable impact on operating profit margins and overall earnings growth.

Nabtesco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nabtesco's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 5.1% in 3 years time.
• Analysts expect earnings to reach ¥18.7 billion (and earnings per share of ¥155.72) by about February 2028, up from ¥10.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥21.3 billion in earnings, and the most bearish expecting ¥15.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, down from 29.4x today. This future PE is greater than the current PE for the JP Machinery industry at 11.6x.
• 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 6.57%, as per the Simply Wall St company report.

Nabtesco Future Earnings Per Share Growth

Risks

• The sales for the 2024 fiscal year decreased by 3.1% due to sluggish demand in the CMP business, impacting revenue negatively.
  
• Operating profit declined by 14.9%, primarily because of poor performance in the CMP segment and the recognition of impairment loss, which adversely affected net margins.
  
• Nabtesco has faced stagnant demand and tough competition in its hydraulic sector, with delayed price passthroughs, potentially hindering future earnings.
  
• There was an over-reliance on the CMP business, which underperformed and affected overall profitability, creating risk to earnings if diversification efforts do not succeed.
  
• While the company plans to improve profitability through initiatives like Project 10, the transition depends on success in the evolving sectors of smart motion control and electrification, posing execution risks that could impact future revenue and net margins.

Valuation

• The analysts have a consensus price target of ¥2701.0 for Nabtesco 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 ¥3500.0, and the most bearish reporting a price target of just ¥2240.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥367.9 billion, earnings will come to ¥18.7 billion, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of ¥2480.0, the analyst price target of ¥2701.0 is 8.2% 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.