On Monday, Morgan Stanley (NYSE:MS) adjusted its stance on UT Group Co Ltd (2146:JP) stock, moving its rating from Overweight to Equalweight. The firm also slashed its price target for the company's shares significantly, from JPY3,600 to JPY1,900. This change reflects a revised earnings forecast and valuation metrics applied by the analyst.
The downgrade was prompted by a reevaluation of UT Group's financial projections. Morgan Stanley's previous price target was based on an expected fiscal year 2025 earnings per share (EPS) of JPY163.1, factoring in dilution and an extraordinary profit of JPY6.3 billion, with a price-to-earnings (P/E) ratio of 22 times.
This P/E was derived from the fiscal year 2024 average forecast P/E for major human resources (HR) services companies, which stood at 17 times, with an additional 30% premium to account for UT Group’s high growth potential and dividend yield.
The new price target of JPY1,900 is the result of a lowered EPS forecast for fiscal year 2025 to JPY86.91, after adjustments for dilution and extraordinary profit of JPY6.3 billion. Despite these adjustments, the analyst maintained the same P/E ratio of 22 times, which still includes the 30% premium on the industry average.
Morgan Stanley's revised financial outlook for UT Group includes a decrease in the operating profit forecast for fiscal year 2025 from JPY11.9 billion to JPY6.5 billion, marking a year-over-year decline of 30%. Additionally, the firm has tempered its operating profit expectations for fiscal year 2026, cutting the forecast from JPY17.8 billion to JPY8.5 billion, which would still represent a 30% year-over-year increase.
The lowered price target and rating change reflect Morgan Stanley's updated assessment of UT Group's sales outlook and gross profit (GP) margin assumptions, which have been adjusted to align with a more conservative sales outlook for the company.
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