On Wednesday, Sumitomo Rubber Industries (5110:JP) (OTC: SMTUF) received an upgrade from Goldman Sachs, moving from a Neutral to a Buy rating. The firm also increased the price target for the company's shares to ¥2,100, up from the previous ¥1,600. This adjustment reflects a positive outlook on the company's ongoing structural reforms, which are expected to enhance future earnings.
The analyst at Goldman Sachs provided a rationale for the upgrade, citing that the revision of earnings estimates and the new price target, which offers a 20% upside, are based on the expected benefits from the company's restructuring efforts. To accommodate these benefits, the base year for the target price calculation has been shifted forward to FY12/25 from FY12/24.
Goldman Sachs also adjusted its operating profit estimate for FY12/24, reducing it by 86% to account for the impact of restructuring on Sumitomo Rubber's U.S. plant, previously a point of concern. However, the firm's estimates for FY12/25 and FY12/26 have been raised by 19% and 41%, respectively. These changes reflect a more optimistic view of the company's financial performance following the restructuring.
The new price target is based on a price-to-book (P/B) ratio of 1.05X and a price-to-earnings (P/E) ratio of 9.6X. Despite the restructuring, Sumitomo Rubber's shares currently trade at a P/B of just 0.85X based on the end-FY12/25E. Goldman Sachs suggests that with the expected return on equity (ROE) of 10% in FY12/25, the company's valuation could be more attractive.
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