Investments In ICT And Non-Resource Sectors Will Drive Future Performance

Key Takeaways

• Proactive investments in non-resource sectors and transforming subsidiaries contribute to inorganic growth, supporting revenue and earnings growth in the future.
  
• Strong sector performance and asset replacement strategies boost profitability, potentially enhancing net margins and sustainable growth prospects.
  
• Reliance on extraordinary gains amidst sluggish performance across key segments may risk consistent long-term earnings growth.

Catalysts

Engages in trading and importing/exporting various products worldwide.

• ITOCHU is aiming for the highest ever profit with a forecast of ¥880 billion, driven by a 10% growth assumption, with strong performance expected in non-resource businesses. This is likely to positively impact future revenue and earnings.
  
• The transformation of Descente into a consolidated subsidiary and proactive investments in non-resource sectors are expected to contribute to inorganic growth in the next fiscal year, supporting revenue and earnings growth.
  
• The company has completed share buybacks and is planning a steady dividend payout, which aims to attract investors by returning value to shareholders, potentially boosting earnings per share (EPS).
  
• Strong performance in the ICT and machinery segments, alongside record-high core profit in chemicals and food distribution, highlights areas of robust growth potential, positively affecting future net margins and revenue streams.
  
• Proactive asset replacement and investment in new growth areas, such as ICT & Financial Business and consumer sectors, are expected to enhance profitability and lead to sustainable growth, impacting net margins and overall earnings positively.

ITOCHU Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ITOCHU's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 6.4% in 3 years time.
• Analysts expect earnings to reach ¥997.4 billion (and earnings per share of ¥728.9) by about March 2028, up from ¥866.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the JP Trade Distributors industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

ITOCHU Future Earnings Per Share Growth

Risks

• The sluggish performance in the Metals & Minerals segment due to lower prices and decreased profitability in steel materials could negatively impact overall revenue and margins.
  
• Natural resources earnings have declined, with a ¥23.5 billion decrease attributed to the previous year’s extraordinary gains and current sluggish market operations, affecting net earnings and profitability.
  
• The Energy & Chemicals segment is experiencing a decrease in core profit due to lower market prices, impacting overall earnings and potentially limiting profit growth.
  
• The General Products & Realty segment faces worsening profitability, particularly in North American construction-related and European tire businesses, which could hurt revenue growth and net margins.
  
• Extraordinary gains, such as the ¥50 billion from the Descente revaluation, are contributing significantly to current profit figures; reliance on such gains could pose a risk to consistent long-term earnings growth.

Valuation

• The analysts have a consensus price target of ¥8916.667 for ITOCHU 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 ¥11300.0, and the most bearish reporting a price target of just ¥7400.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥15590.6 billion, earnings will come to ¥997.4 billion, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of ¥6710.0, the analyst price target of ¥8916.67 is 24.7% 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.