Energy Initiatives And Operational Efficiencies Will Secure Future Revenue Stability

Key Takeaways

• JXAM's stock market transition aims to unlock growth potential and enhance shareholder returns while optimizing asset management and financial stability.
  
• Operational improvements and new energy ventures boost efficiency and profits, supporting future earnings growth and financial stability.
  
• Earnings stability for ENEOS Holdings is threatened by resource price fluctuations, exchange rate risks, and changes in subsidiary contributions.

Catalysts

Through its subsidiaries, operates in the energy, oil and natural gas exploration and production, and metals businesses in Japan, China, Asia, and internationally.

• The listing of JX Advanced Metals Corporation (JXAM) on the Tokyo Stock Exchange and its transition from a consolidated subsidiary to an equity method affiliate could unlock value by allowing JXAM's high growth potential to be reflected in the stock market and contribute to future revenue and shareholder returns.
  
• Improvements in refinery unplanned capacity loss (UCL) have reduced operational disruptions, enhancing efficiency and potentially increasing net margins by minimizing unexpected downtime costs.
  
• The start of operations at the new Goi Thermal Power Plant and entry into the VPP supply-demand balancing market in the electricity business have increased operating profits significantly, suggesting future earnings growth from the energy sector.
  
• Strategic shareholdings and asset sales, including interests in the Caserones Copper Mine, are part of balance sheet management initiatives to optimize asset utilization, reduce debt, and potentially improve net cash flows and financial stability.
  
• Expansion efforts in the oil and natural gas E&P business, such as development in Malaysia and the Tangguh LNG Project in Indonesia, are focused on maximizing value and leveraging growth from LNG as a low-carbon solution, which could positively impact future revenue and earnings stability.

ENEOS Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ENEOS Holdings's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 2.0% in 3 years time.
• Analysts expect earnings to reach ¥266.4 billion (and earnings per share of ¥120.5) by about March 2028, up from ¥252.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥302.5 billion in earnings, and the most bearish expecting ¥230.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the JP Oil and Gas industry at 10.3x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

ENEOS Holdings Future Earnings Per Share Growth

Risks

• The decline in operating profit by ¥83.8 billion year-on-year due to deterioration of inventory valuation from decreased oil prices indicates potential volatility in revenue and net margins linked to fluctuating resource prices.
  
• Risks of resource prices and exchange rate fluctuations, compounded by their unchanged forecast despite exceeding third-quarter results, suggest potential earnings instability.
  
• The transition of JX Advanced Metals from a consolidated subsidiary to an equity method affiliate might dilute ENEOS's earnings power, impacting net profit contributions in future financial reports.
  
• The cumulative UCL performance improvement highlights past inefficiencies in the petroleum products business that could pose ongoing operational risks which may affect net margins if not managed effectively.
  
• The negative time lag impact of minus ¥53.8 billion, combined with the absence of previous onetime profits like the asset sale, underscores potential volatility in operating profits due to timing and one-off items, potentially affecting future earnings stability.

Valuation

• The analysts have a consensus price target of ¥970.0 for ENEOS 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 ¥1100.0, and the most bearish reporting a price target of just ¥800.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥13135.2 billion, earnings will come to ¥266.4 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of ¥780.4, the analyst price target of ¥970.0 is 19.5% 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.