Expanding Into Automotive Software Markets Will Drive Future Success

Key Takeaways

• Expanding solution offerings and strategic price adjustments could improve margins and drive future revenue growth.
  
• Investing in training inexperienced engineers and targeting emerging markets may enhance operational capacity and stabilize costs.
  
• Rising wage pressures, increased recruitment costs, and high turnover rates are squeezing margins and threatening future revenue growth.

Catalysts

Through its subsidiaries, operates as a temporary staffing and contract work company in Japan and internationally.

• Aggressive contract renewal negotiations in March, aiming for higher unit prices, could drive future revenue growth and improve margins, addressing the current GP margin pressures.
  
• The focus on expanding solution business offerings, which have higher value and margin, is likely to contribute to overall revenue growth and enhance net margins over time.
  
• The recruitment of inexperienced engineers with a subsequent focus on their training provides potential for long-term growth through increased operational capacity and can stabilize SG&A ratios.
  
• Expansion of services in the automotive industry with the offshore development center in India, targeting emerging markets for software-defined vehicles, may drive future revenue and earnings growth.
  
• Strategic price adjustments during salary negotiations aim to secure funding for upcoming salary increases while improving the profit base and maintaining a stable or improving GP margin over the next fiscal year.

TechnoPro Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TechnoPro Holdings's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 8.9% in 3 years time.
• Analysts expect earnings to reach ¥26.2 billion (and earnings per share of ¥249.45) by about March 2028, up from ¥16.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥29.3 billion in earnings, and the most bearish expecting ¥20.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 20.1x today. This future PE is lower than the current PE for the JP Professional Services industry at 14.9x.
• Analysts expect the number of shares outstanding to decline by 2.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.11%, as per the Simply Wall St company report.

TechnoPro Holdings Future Earnings Per Share Growth

Risks

• The company's slowing top-line growth driven by a worsening turnover ratio could impact future revenue growth.
  
• Rising wage pressures are causing deterioration in gross profit (GP) margins, negatively impacting net margins.
  
• Increased selling, general, and administrative (SG&A) expenses due to high recruitment costs are negatively affecting net margins and overall earnings.
  
• Uncertainty in global political and economic conditions poses a risk to stable revenue and could impact future earnings.
  
• The high turnover rate, particularly in the construction field, presents a risk to maintaining and improving revenue and overall company performance.

Valuation

• The analysts have a consensus price target of ¥3261.25 for TechnoPro Holdings 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 ¥3800.0, and the most bearish reporting a price target of just ¥2900.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥293.8 billion, earnings will come to ¥26.2 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 5.1%.
• Given the current share price of ¥3212.0, the analyst price target of ¥3261.25 is 1.5% 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.