Falling Resource Prices And Rising Stranded Risks Will Undermine Valuations

Key Takeaways

• Prolonged weakness in resource prices and rising environmental risks threaten core profits, investment capacity, and long-term asset values.
  
• Increased costs, trade barriers, and digital disruption limit financial flexibility, dampen revenue growth, and weaken competitive positioning.
  
• Mitsui's diversified, sustainability-focused investments, operational efficiency, and supply chain expertise support long-term revenue resilience and position the company for profit growth amid global transitions.

Catalysts

Operates as an trading and investment company worldwide.

• Persistent declines in iron ore and metallurgical coal prices, along with subdued LNG and crude oil revenues, are expected to drive significant reductions in Mitsui's core operating cash flow and profit, undermining both earnings growth and the company's ability to fund future investments.
  
• Mitsui's ongoing exposure to large-scale fossil fuel and mining assets increases the risk of stranded assets and impairments as global decarbonization accelerates and stricter environmental regulations take hold, threatening to materially erode long-term asset values and depress return on equity.
  
• The projected increase in interest expense following the acquisition of the Rhodes Ridge iron ore project, combined with weaker profitability in core resource segments, is likely to compress net margins and limit Mitsui's financial flexibility for growth opportunities or shareholder returns.
  
• Rising barriers to cross-border trade caused by supply chain regionalization and global tariff uncertainties, particularly in key U.S. and Asian markets, are expected to lower trading volumes and diminish demand for Mitsui's global logistics and risk management capabilities, resulting in weaker revenue growth.
  
• Intensifying digitalization and the threat of technological disruption raise the risk that traditional trading house functions will be further disintermediated, eroding Mitsui's competitive differentiation, pricing power, and ultimately, its ability to sustain stable margins and long-term earnings growth.

Mitsui Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mitsui compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mitsui's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.1% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach ¥768.4 billion (and earnings per share of ¥282.38) by about July 2028, down from ¥900.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the JP Trade Distributors industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 3.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Mitsui Future Earnings Per Share Growth

Risks

• Mitsui's aggressive investment in projects supporting the global energy transition, such as LNG, low-carbon ammonia, and offshore wind power, aligns with the global decarbonization trend and positions the company to benefit from growing demand for sustainable energy, offering potential for higher and more resilient long-term revenue.
  
• The company's enhanced strategy of portfolio diversification across industries, time horizons, and regions as well as its proven ability to recycle assets and allocate capital efficiently have supported base profit even in volatile business environments, indicating an ability to maintain or improve operating margins over time.
  
• Mitsui's expanding investments in the wellness ecosystem, notably protein, nutrition, and healthcare within Asia's growing markets, tap into the rise of the Asian middle class and urbanization, suggesting ongoing stable to rising demand and the possibility of higher net margins and reduced earnings volatility.
  
• Continued demonstration of strong recurring cash flow-sustaining core operating cash flow around ¥1 trillion for four consecutive years-and the stated target of maintaining high return on equity reflect financial resilience and capacity for sustained or increasing shareholder returns, potentially supporting future profit growth.
  
• Mitsui's focus on enhancing trading functions and capturing global supply chain shifts, alongside its digital transformation efforts, positions the company to benefit from globalization and supply chain complexity, which could drive steady volumes and revenues, especially as demand for risk management and logistics expertise grows.

Valuation

• The assumed bearish price target for Mitsui is ¥2860.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Mitsui's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4050.0, and the most bearish reporting a price target of just ¥2860.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥14689.0 billion, earnings will come to ¥768.4 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.3%.
• Given the current share price of ¥3142.0, the bearish analyst price target of ¥2860.0 is 9.9% lower.
• 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.