Tactical Alliance With Japan Activation Capital And Expansion Into High-Growth Markets To Boost Profitability

Key Takeaways

• Profit structure reforms, including streamlined domestic production and strategic price revisions, aim to boost core operating income and net margins.
  
• Focus on high-growth products and expanding distribution in overseas markets aims to increase international revenue and improve profit margins.
  
• Structural reform costs, competition in Southeast Asia, and challenges in domestic and Chinese markets pose risks to Lion’s profitability and growth prospects.

Catalysts

Manufactures and sells consumer and industrial products in Japan and internationally.

• Lion is actively working on profit structure reforms, including streamlining domestic production facilities, reducing SKUs, and enhancing price revision strategies, which are expected to improve core operating income and net margins.
  
• The company is consolidating production lines and reducing depreciation costs by recording impairment losses, which is projected to significantly reduce expenses moving forward, thereby improving earnings in the domestic market.
  
• Lion is emphasizing growth in competitive overseas markets by expanding its distribution networks, particularly in China, and focusing on higher-margin product lines, which are expected to increase international revenue and profit margins.
  
• The company is strategically investing in high-growth product categories like oral care and pharmaceuticals, as well as rebalancing its portfolio towards higher-margin, value-added products, which should drive revenue growth and improve overall net margins.
  
• Through a partnership with Japan Activation Capital (JAC), Lion aims to accelerate its management strategy and the execution of its medium-term plan, which could drive increased efficiency and financial performance, positively impacting earnings per share.

Lion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lion's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 5.0% in 3 years time.
• Analysts expect earnings to reach ¥22.4 billion (and earnings per share of ¥80.13) by about January 2028, up from ¥18.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ¥24.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, up from 26.4x today. This future PE is greater than the current PE for the JP Household Products industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.29%, as per the Simply Wall St company report.

Lion Future Earnings Per Share Growth

Risks

• The impairment loss of ¥6.2 billion due to structural reform in domestic home care production facilities may temporarily impact net margins and profits. This suggests challenges in sustaining profitability amidst necessary long-term adjustments.
  
• Slowing growth and increased competition in Southeast Asian markets like Malaysia, despite some success in Thailand and other regions, may impact future revenue growth and profit margins from the international segment.
  
• The domestic consumer product sales decline, especially in categories such as Fabric Care, could signal potential risks to the revenue stability and market share in Japan.
  
• The effects of raw material price fluctuations remain uncertain, with current high levels potentially impacting cost structures and squeezing profit margins if not managed effectively.
  
• The Chinese market, despite showing growth, faces economic slowdowns and competition challenges that could impact revenue and profit expectations. This creates risk in their ambitious growth targets, potentially impacting overall earnings if not balanced across regions.

Valuation

• The analysts have a consensus price target of ¥1893.33 for Lion 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 ¥2100.0, and the most bearish reporting a price target of just ¥1750.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥446.8 billion, earnings will come to ¥22.4 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 4.3%.
  
• Given the current share price of ¥1762.5, the analyst's price target of ¥1893.33 is 6.9% 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.