Analysts Forecast Revenue Decline And Lower Earnings By 2028

Key Takeaways

• Decreasing future operating revenues, rising expenses, and increased borrowing costs threaten to negatively impact earnings and net margins.
  
• Low occupancy in newly acquired properties and property disposals may delay positive impacts on future earnings and EPU growth.
  
• Strategic portfolio management and a new distribution policy aim to enhance profitability and ensure stable, growing revenue and earnings per unit.

Catalysts

NBF (Nippon Building Fund Inc.) is Japan's largest real estate investment trust (J-REIT) which invests in office buildings primarily in Tokyo as well as nationwide.

• Despite a strong office market, future operating revenue is expected to decrease, with projected revenues of ¥47.3 billion in the 49th period compared to ¥50.6 billion in the 48th period, impacting future earnings growth negatively.
  
• Rising building management expenses, forecasted to increase by around 2% per annum, could compress net margins and negatively impact profitability.
  
• An anticipated increase in interest expenses due to higher interest rates and increased borrowing costs could lower net income and negatively impact earnings.
  
• The newly acquired D-TOWER TOYAMA has a current occupancy of only 47%, and while it could contribute to future revenues, this low initial occupancy may delay a positive impact on earnings.
  
• The disposal of certain properties, despite yielding disposal gains, results in a forecasted decrease in total operating revenues for the upcoming periods, which could put pressure on earnings per unit (EPU) growth targets.

Nippon Building Fund Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nippon Building Fund's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.5% today to 41.3% in 3 years time.
• Analysts expect earnings to reach ¥41.0 billion (and earnings per share of ¥4818.31) by about March 2028, down from ¥46.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, up from 22.5x today. This future PE is greater than the current PE for the JP Office REITs industry at 20.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Nippon Building Fund Future Earnings Per Share Growth

Risks

• The portfolio occupancy rate is expected to remain high, with existing properties maintaining a 98.8% occupancy rate, supporting stable rental revenue growth. This indicates potential stability in revenues.
  
• Real estate rental revenues are projected to increase by 2.7% over the next fiscal periods, with growth from existing properties at 2.1%, suggesting a steady rise in core revenue streams.
  
• Interest expense increases are being managed, with a disciplined financial management strategy of maintaining a high fixed-rate debt ratio, which may help moderate future net margin impacts from rising borrowing costs.
  
• Strategic property disposals and acquisitions are expected to enhance portfolio quality and profitability, with asset size increasing and yield improving, which could positively impact earnings.
  
• The newly established distribution policy aims to leverage disposal gains and retained earnings to increase distribution per unit (DPU), targeting continuous EPU and DPU growth, providing a positive outlook on future earnings.

Valuation

• The analysts have a consensus price target of ¥131763.636 for Nippon Building Fund 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 ¥152000.0, and the most bearish reporting a price target of just ¥112000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥99.1 billion, earnings will come to ¥41.0 billion, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of ¥121800.0, the analyst price target of ¥131763.64 is 7.6% 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.