International Expansion Will Secure Future Revenue Stability

Key Takeaways

• Strategic international expansion in Vietnam and the U.S. suggests potential for increased revenue and profit from diversified markets.
  
• Upward profit forecasts in multiple business units indicate a positive future outlook for earnings and profitability.
  
• Pressures from high capital demands, property sales challenges, and rising mortgage rates may impact Nomura Research Institute's profitability and revenue growth.

Catalysts

Provides consulting, financial information technology (IT) solution, industrial IT solution, and IT platform services in Japan and internationally.

• The Residential Development business unit has increased operational revenue and profits due to an uptick in housing units sold and higher average prices, leading to a higher gross profit ratio, which could positively impact future revenue and net margins.
  
• The integration of UBS into the management business and the strong performance of the hotel business have driven increased operating revenue, suggesting potential growth in both top-line revenue and business profits.
  
• The buildup of a land bank of ¥2 trillion for mid
• to long-term projects ensures a steady pipeline for future development, likely boosting future earnings and revenue stability.
  
• The company’s new projects in Vietnam and additional investments in the U.S. indicate a strategic international expansion, enhancing the potential for increased operating revenue and profit from diversified geographic markets.
  
• Upward revisions in full-year business profit forecasts across multiple units, including property brokerage and facility management, suggest a positive outlook for future earnings and profitability.

Nomura Research Institute Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Nomura Research Institute's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 15.6% in 3 years time.
• Analysts expect earnings to reach ¥148.6 billion (and earnings per share of ¥267.39) by about June 2029, up from ¥15.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 24.5x on those 2029 earnings, down from 158.6x today. This future PE is greater than the current PE for the JP IT industry at 14.3x.
• Analysts expect the number of shares outstanding to decline by 2.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Risks

• The revision of planned property sales in both Residential Development and Commercial Real Estate could decrease gross profit, indicating a potential underperformance relative to initial forecasts. This could impact both revenue and net margins.
  
• While investment in the Vietnam housing market has been successful, the need for an additional ¥50 billion suggests future investments may come with high capital demands and associated risks, potentially impacting earnings if returns are lower than expected.
  
• The overseas Investment Management business, particularly in the UK, faces challenges with property sales and investor cancellations at Losbery, which may continue to result in declining assets under management (AUM) and pressure on earnings from those regions.
  
• Rising mortgage rates, despite strong customer demand for housing, pose a risk to future sales volumes, which could suppress expected revenue growth in the Residential Development business unit.
  
• The tough environment for land acquisition could eventually lead to higher costs or fewer opportunities for long-term development projects, potentially impacting future revenue and profits.

Valuation

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

• The analysts have a consensus price target of ¥5675.0 for Nomura Research Institute 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 ¥6700.0, and the most bearish reporting a price target of just ¥4900.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ¥952.6 billion, earnings will come to ¥148.6 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of ¥4324.0, the analyst price target of ¥5675.0 is 23.8% 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.