Shrinking Margins And Rising Costs In Transportation And Real Estate Will Hurt Future Earnings

Key Takeaways

• Strong performance in Transportation and Real Estate supports growth, but anticipated expenses and delayed condo sales could compress margins and revenue.
  
• Increased dividends and sustainability projects may strain capital for investments, affected by rising construction costs and labor shortages.
  
• Enhanced earnings forecast and strategic initiatives may improve Keikyu's financial performance and investor confidence amidst rising mobility demand and infrastructure advancements.

Catalysts

Engages in the transportation, real estate, leisure and service, distribution, and other businesses in Japan.

• The upward revision of the fiscal year profit forecast, driven by stronger-than-expected performance in the Transportation and Real Estate segments, suggests future growth potentials; however, the anticipated expenses in the second half could compress net margins.
  
• Delay in condominium sales progress affects the revenue forecast, leading to reduced expectations for the Real Estate segment’s contribution, and indicates a potential decrease in overall revenue growth.
  
• The planned increase in dividend payments as a shareholder return mechanism impacts cash flow allocation and may create challenges in maintaining sufficient capital for investments, affecting earnings stability.
  
• Rising construction costs and labor shortages highlighted in redevelopment projects in key areas such as Kawasaki and Shinagawa could increase operational costs and affect net profit margins long-term.
  
• Cautious navigation of sustainability goals, including transitioning to renewable electricity for railway operations and integrating electric buses, could lead to significant capital expenditures impacting future earnings.

Keikyu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Keikyu's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.0% today to 3.4% in 3 years time.
• Analysts expect earnings to reach ¥11.1 billion (and earnings per share of ¥87.54) by about January 2028, down from ¥88.2 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 17.9x on those 2028 earnings, up from 4.0x today. This future PE is greater than the current PE for the JP Transportation industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 22.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.81%, as per the Simply Wall St company report.

Keikyu Future Earnings Per Share Growth

Risks

• Keikyu's revenue and profits are currently on an upward trajectory, supported by fare revisions and increased mobility demand, which could continue to positively impact its revenue.
  
• The company has revised its operating profit forecast upward, indicating strong business performance across segments, which could lead to higher-than-expected earnings.
  
• Significant passenger growth, especially international traffic at Haneda Airport stations, suggests robust demand, potentially leading to increased revenue from transportation operations.
  
• Keikyu is implementing strategic initiatives to improve financial metrics such as ROE and PER, which could enhance investor confidence and stabilize or increase the stock price.
  
• Progress in construction projects and new services, like contactless payments, could boost revenue and profitability if successfully implemented ahead of competitors.

Valuation

• The analysts have a consensus price target of ¥1326.67 for Keikyu based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥325.5 billion, earnings will come to ¥11.1 billion, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 5.8%.
• Given the current share price of ¥1300.0, the analyst's price target of ¥1326.67 is 2.0% 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.