Focus On Wealth And Asset Management May Improve Outlook Amid Margin Pressures

Key Takeaways

• Strong growth in Wealth Management and Asset Management divisions, driven by equity investment trusts and increased assets under management, promises future revenue expansion.
  
• Global operations and strategic investments, notably in Asia and Oceania, bolster ordinary income and earnings in Global Markets and Investment Banking.
  
• Increased SG&A expenses and declining income signal potential pressure on margins, while international and banking challenges may affect revenue stability amid fluctuating economic conditions.

Catalysts

Operates in the financial and capital markets in Japan and internationally.

• Daiwa Securities Group has seen significant growth in its Wealth Management division due to increased sales of equity investment trusts and expanded asset-based revenue, which could lead to increased future revenue.
  
• The Asset Management division is benefiting from a record profit with an increase in Assets Under Management (AUM) and stable income from real estate and alternative asset management, positively impacting earnings.
  
• The Global Markets and Investment Banking division has experienced strong growth in ECM business and domestic M&A, with high expectations for future revenue gains from unwinding cross-shareholdings, bolstering net margins.
  
• Daiwa Securities Group's global operations have shown a notable increase in ordinary income, especially in Asia and Oceania from wealth management and strategic investments, which could enhance overall earnings.
  
• The company is focusing on customer total asset consulting, which is expected to generate more stock assets and flow income, potentially leading to increased revenue and growth in Wealth and Asset Management divisions.

Daiwa Securities Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Daiwa Securities Group's revenue will grow by 27.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.9% today to 9.3% in 3 years time.
• Analysts expect earnings to reach ¥151.0 billion (and earnings per share of ¥112.1) by about March 2028, down from ¥164.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥103.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 8.7x today. This future PE is greater than the current PE for the JP Capital Markets industry at 11.6x.
• Analysts expect the number of shares outstanding to grow by 0.58% 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.

Daiwa Securities Group Future Earnings Per Share Growth

Risks

• An increase in SG&A expenses, driven by performance-linked bonuses and strategic IT investments, could put pressure on net margins if revenue growth does not keep pace.
  
• The decline in ordinary income by 13.3% and profit attributable to owners of the parent could indicate vulnerabilities in earnings growth, especially if this trend continues over subsequent quarters.
  
• Factors such as yen depreciation affecting expenses at overseas operations highlight potential volatility in revenue derived from international markets.
  
• The compression of spread at Daiwa Next Bank and declines in ordinary income suggest challenges in maintaining banking revenue amid fluctuating interest rates.
  
• Risks associated with provisions and investments in alternative asset management, amidst unclear disclosure, could lead to unpredictability in net operating revenue and profits.

Valuation

• The analysts have a consensus price target of ¥1156.25 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 ¥1040.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1630.8 billion, earnings will come to ¥151.0 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of ¥1016.0, the analyst price target of ¥1156.25 is 12.1% 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.