Expansion Into Autonomous Driving And IOWN 20 Will Unlock Future Opportunities

Key Takeaways

• Expansion in Smart Life and data centers, alongside DOCOMO's investments, are key to driving long-term revenue growth and margin improvements.
  
• Initiatives in autonomous driving and IOWN 2.0 technology indicate potential future revenue streams and efficiency gains.
  
• Declining profits, risky market ventures, and heavy investments amid competition are pressuring margins and earning potential, highlighting execution risks for NTT.

Catalysts

Operates as a telecommunications company in Japan and internationally.

• NTT's expansion in the Smart Life and data center businesses is expected to drive future revenue growth, as these areas showed positive performance despite declines in certain communication services. Improving cash generation from these segments could enhance EBITDA.
  
• Investments in network quality improvements and customer base reinforcement by DOCOMO, while initially costly, are projected to stabilize and potentially increase the customer base, supporting revenue and margin improvements longer-term.
  
• The focus on autonomous driving services, including strategic investments and initiatives with Toyota Motor Corporation, signals potential for future revenue streams in the mobility sector, though it's in an early stage currently.
  
• IOWN 2.0 and its developments in communication technology are anticipated to significantly enhance service offerings, with potential for cost efficiencies and service improvements that could positively impact future operating margins if successful.
  
• Ongoing share buybacks indicate a commitment to returning value to shareholders, which could improve earnings per share (EPS) by reducing the number of outstanding shares, assuming consistent or growing total profit.

Nippon Telegraph and Telephone Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nippon Telegraph and Telephone's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 9.1% in 3 years time.
• Analysts expect earnings to reach ¥1311.4 billion (and earnings per share of ¥16.15) by about December 2027, up from ¥1163.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥1138.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2027 earnings, up from 11.1x today. This future PE is lower than the current PE for the JP Telecom industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 0.83% 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.

Nippon Telegraph and Telephone Future Earnings Per Share Growth

Risks

• The decline in operating profit and a significant drop in profit compared to the previous year could strain earnings and net margins. The ability to maintain or grow profitability in a challenging operating environment will be crucial.
  
• Fixed-line communication service revenues continue to decline, posing a risk to future revenue streams. The necessity of reinforcing the customer base at DOCOMO suggests potential struggles in sustaining market share and revenue.
  
• Increases in disaster recovery expenses and declining operating revenue in the Regional Communication business segment could impact net margins and earnings, reflecting potential vulnerabilities in maintaining cost controls.
  
• The international expansion and investments, such as those in autonomous driving and shrimp aquaculture, are in their nascent stages and could introduce significant execution risk and impact future earnings if not successfully managed.
  
• Ongoing intensive competition in the mobile sector requires NTT to invest heavily in maintaining its customer base and network quality, which might pressure net margins and earnings if these efforts do not yield the anticipated return on investment.

Valuation

• The analysts have a consensus price target of ¥175.42 for Nippon Telegraph and Telephone 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 ¥240.0, and the most bearish reporting a price target of just ¥155.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥14410.7 billion, earnings will come to ¥1311.4 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 4.3%.
• Given the current share price of ¥155.6, the analyst's price target of ¥175.42 is 11.3% 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.