We derive our target price based on a sum-of-the-parts approach. In Fujitsu’s case, we sample 43 companies in similar industries in our coverage, derive a fair value PER and EV/EBITDA multiple for each business domain, calculate business value, and derive an average.
Fair value PER for Fujitsu's businesses range between c16x and c18x and EV/EBITDA between c9.6x and c10.7x. We weigh these by business and this results in a consolidated target PER of 17.2x and EV/EBITDA of 10.6x. This produces a PER-based fair value of ¥3,900 and an EV/EBITDA-derived fair value of ¥3,900. We then apply a 10% premium as we believe management's commitment to boosting RoE and RoIC, combined with buyback expectations, could well lift valuations above sector peer levels. Averaging our fair value estimates based on PER and EV/EBITDA and applying this 10% premium, we set our target price at ¥3,900.

Risks to our target price include 1) IT services/hardware demand exceeding/undershooting our expectations, 2) the sale of subsidiaries and/or idle assets and major shareholder return initiatives, 3) high forex volatility for the yen versus currencies like the dollar, euro, and sterling, and 4) the emergence of unprofitable projects.