Investments In LNG And Healthcare Will Diversify Future Earnings Despite Risks

Key Takeaways

• Investments in growth areas like LNG and healthcare are key revenue drivers, enhancing long-term profitability and earnings stability.
  
• Strategic asset recycling and share repurchases aim to improve return on invested capital, earnings per share, and shareholder returns.
  
• Mitsui faces profitability challenges from low commodity prices, geopolitical risks, unsustainable asset recycling, loss-making businesses, and project delays.

Catalysts

Operates as an trading and investment company worldwide.

• Mitsui is investing in growth areas such as LNG, mobility, healthcare, and protein, which are expected to be key drivers of future revenue growth.
  
• The Ruwais LNG project, along with other new projects, is anticipated to strengthen Mitsui's earnings base, potentially enhancing long-term profitability.
  
• Increased asset recycling is expected to improve return on invested capital (ROIC) and generate additional cash flows, potentially boosting net margins.
  
• Mitsui plans to continue strategic share repurchases, which are expected to enhance earnings per share (EPS) and increase shareholder returns.
  
• Mitsui's investment in sustainable infrastructure, such as Thai gas-fired power generation, is expected to contribute to future earnings stability by diversifying income streams beyond traditional resource sectors.

Mitsui Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsui's revenue will decrease by -1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.1% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ¥886.0 billion (and earnings per share of ¥315.31) by about December 2027, down from ¥1019.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ¥1140.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2027 earnings, up from 9.3x today. This future PE is lower than the current PE for the JP Trade Distributors industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

Mitsui Future Earnings Per Share Growth

Risks

• Mitsui's profits are being negatively impacted by lower commodity prices, primarily in the Mineral & Metal Resources segment. This could adversely affect revenue and net margins if commodity prices remain low.
  
• There are risks associated with geopolitical tensions, such as in China and G20 countries, potentially affecting Mitsui's global business operations and revenues.
  
• The reliance on asset recycling for profit enhancement might not be sustainable in the long term and could lead to reduced profitability if asset sales do not continue at the expected rate, impacting both earnings and cash flow.
  
• Loss-making businesses present a risk to Mitsui's overall profitability, despite plans for exits and turnarounds. Failure to successfully address these businesses could result in reduced net margins.
  
• Delays in projects like Waitsia could postpone the anticipated increases in profit, impacting the timing of revenue realization and financial performance projections.

Valuation

• The analysts have a consensus price target of ¥3733.64 for Mitsui 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 ¥4700.0, and the most bearish reporting a price target of just ¥3200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥13512.7 billion, earnings will come to ¥886.0 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 6.5%.
• Given the current share price of ¥3244.0, the analyst's price target of ¥3733.64 is 13.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.