Strong Future Demand Expected In Green Energy And Digital Services Sectors

Key Takeaways

• Strong demand in GEM and DSS sectors is driving revenue and EBITA growth through green and digital transformation initiatives.
  
• Enhanced shareholder returns and increased core free cash flow support long-term growth and solidify financial stability.
  
• Rising costs, foreign exchange losses, and high competition are straining Hitachi's segments, while increased debt challenges financial flexibility and profitability.

Catalysts

Provides digital system and services, green energy and mobility, and connective industry solutions in Japan and internationally.

• Hitachi's GEM (Green Energy & Mobility) sector is experiencing strong demand for GX (Green Transformation) initiatives, leading to significant revenue increases and a projected 24% revenue growth for FY 2024, likely boosting future revenue and adjusted EBITA.
  
• The DSS (Digital Systems & Services) sector is benefiting from a continuous expansion in demand for digital transformation (DX) and modernization in the IT market. This trend is expected to drive a 10% revenue increase, supporting overall revenue and profit growth.
  
• Hitachi Energy is experiencing rapid growth, with substantial increases in orders, especially in grid integration projects. This high demand is expected to stabilize revenue and sustain profitability, potentially increasing future earnings.
  
• The anticipated increase in shareholder returns and potential future stock buybacks, totaling ¥389.2 billion, are likely to enhance earnings per share (EPS) by reducing the number of outstanding shares.
  
• The increased core free cash flow, influenced by advanced payments for large projects, positions Hitachi to bolster net income and potentially invest in further growth initiatives, solidifying long-term financial performance.

Hitachi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hitachi's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 8.7% in 3 years time.
• Analysts expect earnings to reach ¥966.3 billion (and earnings per share of ¥217.41) by about March 2028, up from ¥575.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥757.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.1x on those 2028 earnings, down from 28.8x today. This future PE is greater than the current PE for the JP Industrials industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.41%, as per the Simply Wall St company report.

Hitachi Future Earnings Per Share Growth

Risks

• Foreign exchange losses have negatively impacted net income, which could continue to affect earnings in future quarters if unfavorable currency trends persist.
  
• The Building Systems segment is facing challenges in China's real estate market, which could limit growth in revenues within this region.
  
• Rising procurement costs are being offset by business scale changes and selling price adjustments, but persistent cost pressures could impact net margins if costs outpace the company's ability to raise prices.
  
• The intense competition in the storage business within the DSS segment has led to declining profitability, which could impact overall segment profits and constrain revenue growth in that business area.
  
• Hitachi's increasing interest-bearing debt, partly due to acquisitions and revenue growth, has increased its debt-to-equity ratio, which could impact net margins and financial flexibility in managing future financial obligations.

Valuation

• The analysts have a consensus price target of ¥4654.2 for Hitachi 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 ¥5600.0, and the most bearish reporting a price target of just ¥3500.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥11151.0 billion, earnings will come to ¥966.3 billion, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of ¥3625.0, the analyst price target of ¥4654.2 is 22.1% 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.