New Digital Mixer And Audio Equipment Expansion Ignite Future Growth

Key Takeaways

• Strong performance in B2B audio and new digital mixer release are key drivers of future revenue growth despite sluggish instrument sales.
  
• Share buyback plan aims to improve EPS and enhance shareholder value by reducing the number of outstanding shares.
  
• Decreased sales in China and write-downs on piano facilities result in reduced profits and a dim outlook, leading to low investor confidence.

Catalysts

Engages in the musical instruments, audio equipment, and other businesses in Japan and internationally.

• Despite a decrease in core revenue due to sluggish sales of musical instruments in China, the B2B audio equipment segment shows strong performance, with an expected high growth of 16% year-over-year, potentially boosting overall company revenue and earnings.
  
• Inventory levels are expected to decrease by ¥24.1 billion to ¥140 billion, potentially increasing cash and cash equivalents, positively impacting the company's liquidity position and potentially enhancing net margins.
  
• The introduction and strong market feedback of the new digital mixer are expected to contribute significantly to revenue from the audio equipment segment, driving future revenue growth.
  
• The company's strategy includes expanding its business domain through automotive sound systems and various partnerships, which could lead to future increases in revenue and improved net profit margins.
  
• Yamaha's plan to buy back up to 18 million shares, corresponding to 3.7% of the outstanding shares, could enhance earnings per share (EPS) by reducing the share count, thereby increasing shareholder value.

Yamaha Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yamaha's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 7.6% in 3 years time.
• Analysts expect earnings to reach ¥37.2 billion (and earnings per share of ¥75.29) by about January 2028, up from ¥20.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥43.5 billion in earnings, and the most bearish expecting ¥31.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 26.4x today. This future PE is greater than the current PE for the JP Leisure industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.23%, as per the Simply Wall St company report.

Yamaha Future Earnings Per Share Growth

Risks

• The revenue from musical instruments has decreased, particularly due to weak sales in China, which could negatively impact overall revenue due to its large share in Yamaha's business.
  
• The prolonged sluggish market in China has led to an impairment loss of ¥7.8 billion for piano production facilities in China and Indonesia, adversely affecting net margins.
  
• A significant drop in net profit, down ¥11.6 billion year-over-year, is largely due to the write-down of piano factories and lowered long-term sales projections in China, impacting earnings.
  
• Due to the deceleration of the Chinese market, the overall revenue forecast for the fiscal year is revised downward, signaling potential long-term revenue challenges.
  
• The company's ROE is projected at a low 3.6%, considerably below the cost of shareholders' equity, indicating poor return on investment, which could dampen investor confidence and affect market perceptions of earnings potential.

Valuation

• The analysts have a consensus price target of ¥1181.21 for Yamaha 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 ¥1466.7, and the most bearish reporting a price target of just ¥1100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥490.9 billion, earnings will come to ¥37.2 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 5.2%.
• Given the current share price of ¥1096.0, the analyst's price target of ¥1181.21 is 7.2% 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.