Divestitures And Uvance Will Strengthen Future Prospects

Key Takeaways

• Strong demand for digital transformation and Uvance initiatives are driving significant revenue growth and order increases, enhancing Fujitsu’s future earnings outlook.
  
• Strategic divestitures and business carve-outs are improving profitability and net margins, with proceeds supporting higher-margin investments and long-term growth.
  
• Challenges in international growth, hardware costs, and slow demand recovery are affecting Fujitsu's revenue and profitability across several segments.

Catalysts

Operates as an information and communication technology company in Japan and internationally.

• The continued strong demand for digital transformation and modernization services in Japan and international markets is projected to significantly drive Fujitsu’s revenue growth. This is particularly emphasized within the Service Solutions segment, which has already seen a 6% increase in Japanese revenue year-on-year.
  
• The Fujitsu Uvance initiative, positioned as a core component of future growth, is showing substantial progress with a 30% rise in revenue and a 32% increase in orders year-on-year. This upward trend is expected to contribute positively to Fujitsu’s overall revenue and earnings in the coming years.
  
• The carve-out of low profitability businesses, particularly in Europe, is leading to improvements in profitability. This strategic move has already positively impacted adjusted operating profit margins by contributing to a 2.6 percentage-point increase in gross margin, hence supporting higher net margins.
  
• Investment in growth initiatives, including the expansion of the modernization business and development of Uvance offerings, is projected to stimulate mid to long-term revenue growth. Notably, the modernization business experienced a 74% increase in revenue, indicating its strong impact on earnings growth.
  
• The ongoing strategic portfolio transformation, including divestitures like the sale of shares in Shinko Electric and other select businesses, is expected to generate ¥1.3 trillion over three years. This will strengthen Fujitsu’s financial position and enable reinvestment in higher-margin businesses, thus potentially boosting net margins and earnings.

Fujitsu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fujitsu's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.5% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ¥328.3 billion (and earnings per share of ¥188.64) by about April 2028, up from ¥317.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, up from 16.1x today. This future PE is greater than the current PE for the JP IT industry at 15.9x.
• Analysts expect the number of shares outstanding to decline by 2.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Fujitsu Future Earnings Per Share Growth

Risks

• Revenue outside Japan declined by 5% due to the carve-out of low profitability businesses, and excluding this carve-out, revenue remained flat, indicating potential challenges in international growth, impacting overall revenue.
  
• Hardware Solutions experienced both revenue and profit declines partly due to the pullback from last year's large-scale deals and increased component costs from the weak yen, affecting the segment's earnings.
  
• The slow recovery of demand in Device Solutions has resulted in revenue and operating income falling below target levels, which could impact future profits in this sector.
  
• Network Products faced a slow recovery in demand and deteriorating profitability due to changes in the product mix, which may affect revenue and net margins.
  
• There are uncertainties and potential issues related to the skewing of revenue towards the fourth quarter in Service Solutions that could lead to difficulties converting backlog orders into sales, impacting earnings predictability.

Valuation

• The analysts have a consensus price target of ¥3361.818 for Fujitsu 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 ¥3800.0, and the most bearish reporting a price target of just ¥2000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥4002.9 billion, earnings will come to ¥328.3 billion, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 6.7%.
• Given the current share price of ¥2868.5, the analyst price target of ¥3361.82 is 14.7% 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.