Yen Depreciation And Expansion Activities Will Strengthen Future Operations

Key Takeaways

• Strategic measures and yen depreciation are anticipated to boost net margins and operating profit in petroleum products.
  
• Expansion in E&P and production capacity for EV materials is expected to drive revenue growth and improve margins.
  
• Challenges across petroleum, renewable energy, and E&P segments, combined with debt concerns, pose risks to ENEOS's financial stability and profit margins.

Catalysts

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

• ENEOS Holdings is anticipating margin improvements in petroleum products due to strategic operational measures and the yen's depreciation, which could positively impact net margins and operating profit.
  
• Expansion in the oil and natural gas exploration and production (E&P) business, particularly in Indonesia and Malaysia, is expected to increase sales volumes and drive revenue growth.
  
• The launch of the Goi Thermal Power Plant, a high-efficiency LNG power facility, aims to reduce dependency on purchased electricity, potentially improving net margins through cost reductions.
  
• Increased production capacity in high-performance materials, particularly for electric vehicle components like SSBR and battery binders, is likely to drive revenue growth and improve net margins.
  
• The listing of JX Advanced Metals Corporation is intended to demonstrate high-growth potential and attract investment, which could enhance earnings through improved market valuation and investment returns.

ENEOS Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ENEOS Holdings's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 2.0% in 3 years time.
• Analysts expect earnings to reach ¥281.6 billion (and earnings per share of ¥116.34) by about December 2027, up from ¥184.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥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 10.2x on those 2027 earnings, down from 12.0x today. This future PE is lower than the current PE for the JP Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 4.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.83%, as per the Simply Wall St company report.

ENEOS Holdings Future Earnings Per Share Growth

Risks

• The deterioration in inventory impact and negative time lag affecting year-on-year net profits could indicate potential volatility and challenges in maintaining consistent earnings, impacting net margins.
  
• Declines in crude oil prices and the ongoing global economic slowdown pose risks to the operating profit of the petroleum products segment, potentially affecting revenue and net margins.
  
• High expenses and potential equipment failures in the renewable energy sector could negate profit improvements, impacting the segment's earnings.
  
• The decrease in operating profit for the oil and natural gas exploration and production (E&P) segment due to higher labor and material costs may result in squeezed profit margins.
  
• Increased net interest-bearing debt and net cash outflow, including dividend payments and share buybacks, signal liquidity and leverage concerns, potentially impacting overall financial stability and earnings.

Valuation

• The analysts have a consensus price target of ¥918.57 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 ¥670.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥13736.6 billion, earnings will come to ¥281.6 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 8.8%.
• Given the current share price of ¥806.9, the analyst's price target of ¥918.57 is 12.2% 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.