Dynamic Transition Into Wealth Management Drives Growth Despite Global Challenges

Key Takeaways

• Transition to wealth management and customer trust increase asset inflows, driving revenue stability and growth in asset-based revenues.
  
• Strategic focus on acquisitions and improved overseas operations enhance growth potential, promising increased shareholder value and international earnings.
  
• Market volatility and strategic delays may pressure revenue, margins, and shareholder returns, while geopolitical risks further impact investment banking activities.

Catalysts

Primarily operates as a securities broker-dealer in Japan and internationally.

• Daiwa Securities Group's transition to a wealth management business model and success in garnering customer trust have led to increased asset inflows, which are expected to drive growth in asset-based revenues and overall revenue stability in the future.
  
• Growth in assets under management (AUM) in both Real Estate Asset Management and Alternative Asset Management, supported by strategic asset inclusion and capital gains, suggests potential for continued growth in net operating revenues and profitability.
  
• The company's strategic focus on inorganic growth opportunities, such as potential investments and acquisitions, aims to complement existing capabilities, potentially enhancing growth in earnings and shareholder value.
  
• Daiwa's overseas operations have shown improved ordinary income, particularly in equity and M&A revenues, signaling potential for increased earnings from international markets as global conditions stabilize or improve.
  
• The balance between maintaining a strong capital base and pursuing strategic investments may lead to future capital allocation decisions, such as share buybacks, that could impact shareholder returns and earnings per share (EPS).

Daiwa Securities Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Daiwa Securities Group's revenue will grow by 26.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.1% today to 9.0% in 3 years time.
• Analysts expect earnings to reach ¥148.3 billion (and earnings per share of ¥109.72) by about November 2027, up from ¥145.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥111.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2027 earnings, up from 9.9x today. This future PE is lower than the current PE for the JP Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.27%, as per the Simply Wall St company report.

Daiwa Securities Group Future Earnings Per Share Growth

Risks

• The volatility in market conditions, particularly in August and September, impacted investment trust sales and could affect revenue consistency in the Wealth Management division if such conditions persist.
  
• Delays in share repurchase decisions and a strategic focus on inorganic growth, such as investments like Aozora Bank, may affect future shareholder returns and capital allocation efficiency, impacting overall earnings.
  
• Declines in FICC revenues and challenges in managing domestic positions due to sharp declines in domestic interest rates may continue to impact net margins negatively within the Global Markets division.
  
• SG&A expenses increased, driven by higher personnel expenses due to wage hikes and performance-linked bonuses, which could pressure profit margins if revenue growth doesn't keep pace with cost increases.
  
• The geopolitical risks, such as the upcoming U.S. election and ongoing geopolitical tensions, could contribute to market volatility, affecting investment banking activities and potentially leading to revenue fluctuations.

Valuation

• The analysts have a consensus price target of ¥1163.75 for Daiwa Securities Group 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 ¥1350.0, and the most bearish reporting a price target of just ¥1050.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥1643.1 billion, earnings will come to ¥148.3 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of ¥1022.5, the analyst's price target of ¥1163.75 is 12.1% 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.