Reducing Equity Risk May Improve Capital Efficiency And Stabilize Future Earnings

Key Takeaways

• Strategic shift to reduce equity risk and improve capital efficiency may enhance net margins and reduce market volatility exposure.
  
• Initiatives to match interest rates with long-term bonds might lower hedging costs and stabilize earnings.
  
• Rising surrender rates, fluctuating interest rates, increased expenses, and forex sensitivity threaten T&D Holdings' policy retention, margins, and overall profitability.

Catalysts

Through its subsidiaries, provides insurance products and services primarily in Japan.

• The strategic shift towards reducing equity risk by selling non-core holdings and reclassifying shares for pure investment purposes, as well as the plan to achieve a 0 strategic shareholding balance by 2031, is expected to improve capital efficiency and potentially enhance net margins by reducing exposure to market volatility.
  
• Continued initiatives to match interest rates and align cash flows with long-term bonds to handle interest rate risks may lead to lower hedging costs, thereby potentially improving net margins and earnings stability.
  
• The recovery in net assets of Fortitude, driven by gains on bond valuations due to decreasing US interest rates, suggests a future risk-adjusted increase in earnings as accounting profits are realized.
  
• Planned share buybacks, notably impacting adjusted EPS growth, suggest further improvements in earnings per share through reductions in outstanding shares.
  
• The success in increasing average assumed investment yields during the fiscal year indicates potential growth in interest and dividend income, supporting future revenue increases for the life insurance subsidiaries.

T&D Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming T&D Holdings's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 4.7% in 3 years time.
• Analysts expect earnings to reach ¥136.5 billion (and earnings per share of ¥270.83) by about December 2027, up from ¥121.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥120.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2027 earnings, up from 12.2x today. This future PE is greater than the current PE for the JP Insurance industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.38%, as per the Simply Wall St company report.

T&D Holdings Future Earnings Per Share Growth

Risks

• The rising surrender and lapse rates for Taiyo and Daido Life may indicate customer dissatisfaction or financial distress, potentially leading to decreased policy retention and negatively impacting revenue.
  
• Fluctuating U.S. interest rates can significantly affect accounting profit changes, especially in relation to Fortitude’s bond valuations, which could impact net margins and earnings unpredictably.
  
• The increase in operational expenses at Taiyo and Daido, with no offset through revenue growth, could pressure net margins and affect overall profitability.
  
• Unrealized losses on foreign bonds and JGBs pose a financial risk that may necessitate future loss reporting, which could put pressure on investment revenues and profit margins.
  
• Sensitivity to foreign exchange rates, with a ¥1 appreciation causing a ¥440 million loss in group adjusted profit, exposes earnings to forex fluctuations, which could negatively affect net income.

Valuation

• The analysts have a consensus price target of ¥3368.89 for T&D 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 ¥4000.0, and the most bearish reporting a price target of just ¥2850.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥2892.4 billion, earnings will come to ¥136.5 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 4.4%.
• Given the current share price of ¥2832.0, the analyst's price target of ¥3368.89 is 15.9% 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.