Long Term Face To Face Meeting Recovery Will Support Stronger Utilization And Earnings Power

Catalysts

About TKP

TKP operates rental meeting spaces, leisure and lodging facilities, and wedding venues, with a growing group structure that includes Lilycolor and NOVARESE.

What are the underlying business or industry changes driving this perspective?

• Record quarterly performance in the core rental space, mid and long term rental, and Bridal businesses, alongside an upward revision of full year guidance to JPY 104b of revenue, points to stronger utilization of existing assets and a possible lift in earnings power.
• Growing face to face meeting and office usage, with revenue per tsubo in flexible space in Q2 at JPY 45,000 and effective rentable area above pre COVID levels, supports higher space productivity that can translate into sustained revenue and operating margin support.
• Rapid expansion of leisure and lodging, including the build out to 20 APA Hotels and new resort concepts like SHONIN PARK and ISHINOYA Beppu, increases exposure to domestic tourism and regional revitalization projects, which can broaden revenue streams and support overall group earnings.
• Integration benefits across TKP, Lilycolor and NOVARESE, such as shared facilities, joint SG&A reviews and cross selling of events and weddings into TKP’s corporate customer base, create additional monetization points that can help both revenue growth and cost efficiency, supporting net margins.
• Expansion of higher value offerings such as large scale banquet halls, corporate events, and community focused shared offices under the fabbit brand, including new openings in major business hubs like Fukuoka, Yokohama, Tokyo and Oita, increases exposure to corporate and regional demand, which can support revenue and, once prior investments are absorbed, earnings.

Assumptions

This narrative explores a more optimistic perspective on TKP compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming TKP's revenue will grow by 17.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.7% today to 5.4% in 3 years time.
• The bullish analysts expect earnings to reach ¥8.4 billion (and earnings per share of ¥210.35) by about January 2029, up from ¥3.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥5.9 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2029 earnings, down from 23.9x today. This future PE is greater than the current PE for the JP Real Estate industry at 12.5x.
• The bullish analysts expect the number of shares outstanding to decline by 3.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.3%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• TKP is opening many new rental spaces, hotels and leisure facilities, which increases fixed assets and interest bearing debt. If meeting, tourism or regional demand softens over time, utilization could fall short of expectations and weigh on revenue and earnings.
• The group increasingly depends on face to face meeting and office use, including foreign and IT companies returning to offices. If working habits shift back toward remote or hybrid in the long run, rental space usage and catering demand could weaken and pressure revenue and net margins.
• Leisure and lodging growth is concentrated in regional cities such as Oita, Beppu and other local areas where RevPAR is lower than in Tokyo. A mix shift toward these locations over time could cap pricing power and lead to softer revenue growth and lower earnings than hoped.
• The Bridal business through NOVARESE is currently supported by regional wedding demand and larger guest counts. If Japan sees a long term decline in wedding numbers or spending per wedding, utilization of wedding venues and related services could fall, reducing revenue and profit contribution.
• Lilycolor’s profitability is currently weak in the first half and is affected by fewer new housing starts. If housing related demand stays subdued and reform demand is not strong enough, the segment may struggle to lift margins and could drag on group net margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for TKP is ¥2500.0, which represents up to two standard deviations above the consensus price target of ¥2175.0. This valuation is based on what can be assumed as the expectations of TKP's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥2500.0, and the most bearish reporting a price target of just ¥1850.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be ¥155.8 billion, earnings will come to ¥8.4 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of ¥2243.0, the analyst price target of ¥2500.0 is 10.3% 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.