Founded in 1955 and headquartered in Osaka, Japan, Daiwa is a leading construction and real estate company with a diversified portfolio of operations. The company operates in multiple segments, including single-family houses (19% of 1HFY25 revenue), rental housing (25%), condominiums (5%), commercial facilities (23%), Logistics, business & corporate facilities (27%) and Environment and Energy (1%). With a strong global presence, Daiwa House has expanded its operations across Asia, North America, and Europe, providing innovative housing and infrastructure solutions to cater a wide range of market needs.

On track to medium-term objectives

Daiwa launched its 7th medium-term management plan in May 2022, spanning FY22-FY26, with the goals of establishing a sustainable growth model that maximizes both business and social value over the long term. The plan focuses on three key management policies: evolving the revenue model by accelerating overseas business growth, expanding a circular value chain, and achieving carbon neutrality by making all buildings carbon-free; optimizing management efficiency by achieving profit growth with capital efficiency through portfolio optimization and enhanced cost competitiveness; and strengthening the management base through digital transformation, enhancing human capital, and improving governance.

Performance target includes achieving a net sale of JPY5.5tn, operating income of JPY500bn with a margin of 9% and ROE of 13% or higher with dividend payout of 35% or more by FY26. The company has made steady progress, with FY25 net sales expected to reach JPY5.37tn and operating income projected at JPY440bn. Additionally, Daiwa plans to invest approximately JPY2.2tn in real estate development during FY22-FY26, with 36.3% of the investment completed as of 1HFY25, aligning with the plan’s timeline.

Robust margins highlight competitive edge

Over the past three years (FY21-FY24), Daiwa has demonstrated a steady financial performance. Revenue grew at a CAGR of 8%, reaching JPY5.2tn in FY24, driven by the expansion in core businesses and strategic investments. EBITDA increased from JPY432bn in FY21 to JPY557bn in FY24 with the EBITDA margin remaining stable between 10%-11% during this period.

Despite the strong operating performance, FCF remained negative at -JPY267bn in FY24, mainly due to aggressive expansion and strategic investments, with annual capex ranging from JPY300-500bn during FY21-FY24. However, the total cash and short-term investments stayed strong at JPY350bn-JPY450bn, while the company’s debt increased gradually to JPY2.2tn in FY24 from JPY1.4tn in FY21. Consequently, the leverage ratio increased slightly from 0.7x in FY21 to 0.8x in FY24.

Over the same period, the company’s top-line growth lagged its peers, with Sekisui growing at CAGR of 8% to reach JPY3.1tn and Kajima reporting a CAGR growth of over 12%, reaching JPY2.6tn in FY24. However, the company’s EBITDA margin of 11% exceeds Sekisui (10%) and Kajima (6%). Both of its peers saw an increase in debt over the last three years, but leverage remained lower compared to Daiwa. Sekisui and Kajima’s leverage ranged between 0.3-0.5x over FY21-24.

Daiwa recently released its 1HFY25 earnings update, reporting 4.2% YoY revenue growth, reaching JPY2.7tn. This growth was primarily driven by a robust performance in Single-Family houses business (+13.3%) due to the steady progress in the sale of development properties and impressive performance overseas, particularly in US. EBITDA increased by 20.3% to JPY298.1bn with 150bps YoY margin expansion to 11.2%. Net income rose by 17.5% to JPY221bn with a margin of 8.3%, bolstered by Commercial Facilities and Logistics, Business & Corporate Facilities business segments due to price pass-through and effective cost control measures.

Limited upside potential

Daiwa’s P/E ratio stands at 11x, based on the projected EPS of JPY438 for FY25, which is in line with its 10-year historical average of 11x and its peers, Sekisui at 12x and Kajima at 12x. Similarly, Daiwa House’s EV/EBITDA is currently trading at 8x for FY25, slightly higher than its 10-year historical average of 7x, yet at a discount to Sekisui at 11x and Kajima at 10x. The discount in EV/EBITDA valuation compared to its peers is attributed to the company’s lower expected EBITDA growth over the next three years.

Analyst’s projects EBITDA to grow at a 3-year CAGR of 4.5%, with margins are expected to stay at 10.5%-11.5%. In comparison, Sekisui and Kajima are expected to achieve EBITDA growth of 12% and 7% respectively, while margins are expected stay at 9-10% and 6-7%, respectively. Out of the nine analysts covering the stock, three have rated it as "Buy” and two as “Outperform", with average target price of JPY5,108, implying upside potential of around 8% from current market price.

Overall, Daiwa House is well-established with a track record of delivering consistently strong financial performance and is engaged in many development projects to sustain its growth. However, the investors should consider the changes in government policies or tax systems related to housing that would impact the demand, rising material costs, and potential supply shortages are likely to impact the timelines and profitability.