Diversification And Operational Efficiency Propel Revenue And Margin Growth In Financial Markets

Key Takeaways

• Diversification across business lines and regions is enhancing revenue growth and stability, positively impacting future earnings and margins.
  
• Operational efficiency and strategic focus on high-quality returns bolster long-term profitability and balance earnings across divisions.
  
• Economic volatility, competitive pressures, and regulatory changes could strain profitability and revenue, impacting Nomura's financial stability and market-driven business divisions.

Catalysts

Provides various financial services to individuals, corporations, financial institutions, governments, and governmental agencies worldwide.

• Nomura Holdings is diversifying its revenue sources across different business lines, including equities, fixed income, and investment banking, with all regions reporting stronger revenues than the same period last year. This diversification is likely to enhance future revenue growth.
  
• The company reported a 30% increase in recurring revenue from Wealth Management and Asset Management, indicating an increase in stable revenue streams, which can positively impact net margins and provide more predictable earnings.
  
• Continued investment in operational efficiencies and technology transformation is leading to a decrease in non-personnel costs, contributing to a reduced cost-to-income ratio in the Wholesale segment. This improved operational efficiency is set to positively impact net margins over time.
  
• The successful execution of multiple primary transactions in volatile market conditions and strong net inflows into recurring revenue assets suggest Nomura's capacity to grow its revenue from market opportunities, potentially enhancing its earnings outlook.
  
• The company's strategic move towards achieving higher quality ROE by balancing earnings across divisions and reducing reliance on market conditions indicates an improvement in the long-term earnings potential and stability.

Nomura Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nomura Holdings's revenue will decrease by -1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.4% today to 15.6% in 3 years time.
• Analysts expect earnings to reach ¥266.0 billion (and earnings per share of ¥95.52) by about November 2027, down from ¥274.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥183.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2027 earnings, up from 9.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 1.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

Nomura Holdings Future Earnings Per Share Growth

Risks

• Economic and market conditions, along with political events and investor sentiment, could impact revenue and earnings as these factors may lead to volatility and uncertainty in financial markets.
  
• The company faces competitive pressures in areas like ECM and international business expansion, which might strain net margins if pricing power is compromised.
  
• Volatile currency exchange rates and interest rates could impact profitability and revenue streams, particularly if hedging strategies fail to fully mitigate risks.
  
• Potential regulatory changes, including Basel III implementation, could affect capital ratios and financial stability, thereby impacting net income and earnings.
  
• Dependence on market conditions for business divisions such as wealth management and wholesale presents a risk if market activities slow down, which could lower revenue growth and profitability.

Valuation

• The analysts have a consensus price target of ¥942.5 for Nomura 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 ¥1150.0, and the most bearish reporting a price target of just ¥700.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥1709.6 billion, earnings will come to ¥266.0 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of ¥907.8, the analyst's price target of ¥942.5 is 3.7% 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.