Calculated Expansion In Drones And Starlink Drives Revenue Growth While Overcoming Competitive Challenges

Key Takeaways

• Strategic initiatives in drones, Starlink, and DX Business Services are likely to boost future revenue and earnings through market expansion and technological integration.
  
• Share buybacks and stock split actions are expected to enhance shareholder value and positively affect stock prices through EPS growth.
  
• Competitive pressures and reliance on cross-shareholding partnerships risk future revenue growth, customer retention, and shareholder confidence despite revenue and income increases.

Catalysts

Engages in the provision of telecommunications services in Japan and internationally.

• Steady growth in Communications ARPU and DX Business Services segments indicates strong potential for future revenue expansion, driven by increasing demand for digital transformation solutions and improved customer retention from value-added services.
  
• The collaboration with Lawson aims to enhance customer engagement and leverage synergies, which is expected to support an increase in total ARPU revenues and potentially improve net margins through better customer loyalty and diversified service offerings.
  
• KDDI's focus on key growth areas, such as drones and Starlink, represents a strategic move into new markets, likely to contribute to revenue growth and improve earnings as these technologies mature and integrate into the core business.
  
• Planned share buybacks and the recent 2-for-1 stock split may support EPS growth by reducing the number of shares outstanding, thereby increasing shareholder value and potentially impacting stock price positively.
  
• Continued efforts to enhance technology cost efficiency alongside a competitive pricing strategy are expected to contribute to improved net margins, supporting healthier financial performance in the mid to long term.

KDDI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KDDI's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 12.8% in 3 years time.
• Analysts expect earnings to reach ¥798.1 billion (and earnings per share of ¥418.14) by about November 2027, up from ¥620.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥712.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2027 earnings, down from 15.7x today. This future PE is greater than the current PE for the JP Wireless Telecom industry at 9.4x.
• Analysts expect the number of shares outstanding to decline by 1.8% 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.

KDDI Future Earnings Per Share Growth

Risks

• Despite an overall increase in revenue and income, KDDI's net additional subscribers decreased year-on-year due to competitive pressures from peers, which could negatively impact future revenue growth and customer retention.
  
• KDDI's strategy relies heavily on network quality and differentiation, but with competitors potentially enhancing their offerings and network capabilities, there is a risk of eroding KDDI's competitive edge, affecting operating income.
  
• The planned CapEx reduction could lead to a decline in network investment, possibly affecting long-term revenue growth and ARPU by reducing the perceived quality or coverage capabilities relative to competitors.
  
• Heavy reliance on cross-shareholding arrangements, like those with Toyota and Kyocera, pose risks if these partners decide to divest, potentially impacting shareholder confidence and earnings stability.
  
• Despite increasing competition in the middle capacity data segment, KDDI's current ARPU initiatives may not be sufficient to maintain projected growth, posing risks to achieving their revenue targets and net margins.

Valuation

• The analysts have a consensus price target of ¥4969.62 for KDDI 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 ¥6600.0, and the most bearish reporting a price target of just ¥3730.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥6217.0 billion, earnings will come to ¥798.1 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 4.3%.
  
• Given the current share price of ¥4835.0, the analyst's price target of ¥4969.62 is 2.7% 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.