Market Capitalization 1.674B
(USD15.4M)
Debt 1.04B (USD 9.58M)
Cash 972M (USD 8.9M)
Enterprise Value 1.75B
(USD16.1M)
Sales 5.9B (USD 54.3M)
Operating Earnings 742M (USD7M)
Net Profit 540M (USD 5M)
Operating Cashflow 850M
(7.8M)
Capital Expenditure 100M (921k-1M)
Owner’s Earnings 650M (6.5M)
Current Assets 3.8B
Current Liabilities 1.76B
Working Capital 2B
(USD20M)
Working Capital – cash
= 2B – 900M = 1.1B
(20 - 9 = USD11M)
Fixed Assets 2B (USD 20M)
Pension 44M (USD 440K)
Equity(capital employed)
= Fixed Assets +
working capital
= 3.5-4B ( USD 35-40M)
Capital returned 650M
Capital Employed = 4B +
1.04B debt = 5B
ROIC = 10-13% (say 10% to be conservative)
Tangible Book value Growth = 14-15%
(7-9% to be conservative for lack of
projects and slow down due to Corona Virus and a sharp surge of construction in
original anticipation for Tokyo 2020 Olympics)
Debt to Equity 26%
Net quick
1.2
AR turn
6B/1.25B = 4.8
Inv. Turn
6B/1.6B = 3.7
Takeda manufactures machines for drilling
and cutting construction steel. Sales increased 14% from 2018-2019 to 5.9-6.1B
yen or USD54m. Despite Takeda’s clean balance sheet and growth, Takeda has
risks— such as a lack of sufficient size to bargain with suppliers; lack of
pricing power due to owning only a part of the metal processing supply chain,
reflected in its gross margins relative to competitors; and rising raw material
costs, particularly steel to make steel processing machines; and increasing
labor costs with a shortage of qualified employees in the market.
When you take a look at Takeda’s cost of
goods sold— raw materials, or steel and other metals used in building machinery—
takes up 51%. Due to a lack of bulk purchasing from suppliers, they may not get
significant discounts.
While orders for steel processing machines were
strong in 2019, this only reflects Japan’s temporary expansion of domestic
construction for the Olympics. Takeda is trying to expand their circular saw
machine segment to automotive sectors and has tried talking with distributors
to expand their presence in South East Asia.
I tried contacting IR and management via
email and LinkedIn, but never received a reply from IR. Whether this is due to
translation issues, negligence, a lack of effort—
it’s up to your interpretation. From
2010-2015, no dividends were paid; 2010 and 2011 resulted in negative cash flow
and a minor loss; revenues were less than sufficient in 2012-2013 before Takeda
started getting back on track in 2014. Understanding why these years affected
Takeda so badly is crucial. It could be something other than a cycle in
construction or the Fukushima disaster. This warrants further investigation and
I will amend this part when I figure it out.
Management has a substantial stake (33%) in
the company. Koichi Takeda owns 13% of the company; Yuchi Takeda, the CEO, owns
10%, Takeda’s manufacturing department manager, Ito Ishinori, owns 5%, Takeda
and there is a Takeda partner’s stock at 5%. From 2016-2019, there was a
consistent and growing dividend. Certainly buybacks are a superficial thing for
Takeda, as they have only bought a negligible amount. Takeda’s stock was split
on 1991— 2 for 3 and on 1993— 5 for 6. In 2017 there was a consolidation of 10
shares into 1.
In 2019, 68-70% of Takeda’s business— 3.25B
yen or 30M USD— revolves around selling high speed steel processing and
drilling machines with additional modifications (shaping and bending) to formed
steel frame joint plates such as H-beams, I-beams, construction steel, etc.
13-16% of sales, are from circular sawing
machines (not the ones you buy at home-depot, these are bigger and factory
specific) from automobile and construction at 983M yen or USD 9M. The rest
(14%) are custom orders executed through Takeda’s 40% owned subsidiary, Takeda
Seiki.
The segment for Molds (8-10%) are kept specifically
for automobile makers which Takeda receives consigned production from; Takeda
keeps this as a complementary segment which only grows at 1-2% annually.
Takeda also purchases and sells press molds
and.
Of the 5.9B yen or USD54m sales, net profit
was about 540M or USD5M, and operating cash flow was 850M (USD7.8M), with
capital expenditures fluctuating from 90-120M yen, or USD1-1.3M, resulting in
an owner’s earnings of approximately 650-750M yen (USD6.5-7M).
At 1.67M yen (usd 15.4M) of market
capitalization and 1 B yen or USD 9.58M of debt, paying USD35M for a company
like Takeda which generates USD7M for owners is not bad, and you can expect
earnings to grow at 8-11% even in bad years.
Author’s estimates for a range for ASP
From other competitors who make circular
saws like Amada, and other manufacturers of metal cutting and drilling
machinery, we know that the price for each individual machine is within a range
of USD 10,000 to 50,000. This means that with an ASP of 27,000, there were at
least, or approximately 2000 machine units sold annually.
Takeda’s largest customers are also its
distributors. Yamazen (TSE:8051), which is an international distributor for CNC
machines, metal cutting and forming tools, and machinery. As a distributor,
Yamazen makes up 1B or USD 9M, 15-16% of total sales.
Another customer, distributor, and
competitor, Amada (TSE:6113), provided 15-16% of sales or USD9M in 2019. Takeda
actually supplies Amada as an OEM for circular saws and helps them with certain
productions. In return, Amada also distributes some of their products abroad,
but only to a limited extent.
Takeda President Yuichi Takeda revealed at
a financial meeting that being an OEM for circular saw cutting machines would
be limiting to their bottom line, and decided to split ways by creating its own
brand of circular saw machine— creating new distributorships and sales
channels, and opening a sales office in Malaysia in 2016 to target automobile
parts manufacturers.
On May 31, 2019, Takeda suspended supplying
Amada’s processing machines, as their OEM overseas. On June 2019, they
officially switched over to their own brand.
While competitor and distributor Amanda has
operating margins similar to Takeda at 12-13%, their gross margins are higher
at 41-42%, while Takeda has gross margins of 29-31%. By developing their own
brand, Takeda will temporarily decrease sales for circular saws and decrease
total sales by 7%, but will expect higher gross and net profit margins in the
long term.
Amada has a higher mark up, but also spends
more with an SG&A margin of 26%, whereas Takeda only has 17%. However, this
is not an apples to apples comparison due to size—Amada has 9000 plus
employees, and Takeda only has 170-190 employees. Amada offers more to the
customer in terms of having welding and other services for steel contractors to
view it as a one stop shop.
The cash conversion cycle for Takeda, at
170 days, is shorter than Amanda; Amanda is at 240 days. Takeda has stated in
its annual report that its goal is to reduce the average lead time of four
months to three months by improving processes and steadily procuring parts with
better inventory management and IT systems.
When looking at a breakdown of SG&A, we
can tell that logistics is 25% of total SG&A for Takeda and only 10% of
Amada. Depreciation is 6-7% of SG&A for both, and salaries and bonuses make
up 43-44% each.
Another customer and distributor of metal
processing components, Matsumoto Sangyo, makes up 9-10% of sales at 554M yen or
USD 5M and has networks in Thailand and Guang Zhou, China.
Smaller Distributors in Singapore and
Malaysia include— Fusion Technologies Pte. Ltd, M.T.M Co.,Ltd, and Maxton
International Pte. Ltd. These distributors are tied with construction and
manufacture and distribute concrete forms, tubes and accessories. My estimate
is that sales per customer for the 3 companies listed above are around USD 500k
to 2M.
At the end of 2019, the inventory breakdown
for Takeda was as follows:
Raw materials— 489M or about 30% of
inventory; work in progress— 346M or about 21% of inventory; finished goods— 788M,
or 49-50% of total inventory. This amounts to an inventory total of 1.6B yen. To
give you a historical context, finished goods was once 60% of total inventory
and raw materials was once as low as 20-22%.
Competitor Amada’s inventory breakdown
includes only 22% of raw materials, 11% work in progress, and 67% finished
goods. Takeda, however, has a higher inventory turnover of 2.7x, while Amada
has a turnover of 1.7x.
Takeda has decreased its debt to equity
from 100% in 2015 to 25% in 2019. Takeda has revolving credit of 400M yen,
which lasts until August 2020. Its capital lease is due January 2026, and its
long term loans due October 2023 is 758M yen.
As of now, capital expenditures for growth
are limited. When looking at book value, machines and equipment only comprise
6%. CEO Yuichi Takeda understands that if the company grows too fast, they may
not be able to control quality, and as of now, their capacity is sufficient for
domestic consumption. Whether additional factories are constructed for new
sales abroad remains to be seen.
Surprisingly property, plant, and equipment
is only 6% of tangible book value. This consists of machines such as Mitsubishi’s
MV1200R, Trumpf’s TruLaser3030, TruBend5230, Mori Machinery’s processing
equipment for certain customer projects.
Takeda does not consolidate its financial
statements with Takeda Seiki since it owns 40% of it, but the tangible book
value summed above includes the subsidiary. It’s interesting to note that
buildings and land comprise of 81% of total book. There certainly is a lot of
space to expand should unit volume grow.
Working capital is 2B yen, if we take out
cash, it would be 1B yen or USD11M.
Total book value would be working capital
less cash plus debt, with all fixed assets mentioned in the last paragraph. This
would be about 4B yen, or USD44M. With USD6-7M of owners earnings generated
each year on USD44M gives us a return of capital of about 11-14%.
For the past 3 years, Takeda’s tangible
book value growth has been 15%. However, to throw caution to the wind, there
will be eventual domestic sluggishness in Japan, not only due to the Corona
Virus, but because most of the construction was in anticipation for Tokyo
Olympics. Domestic (Japan) sluggishness in civil works is bound to happen. Competitor
Amada’s tangible book value growth has been 1-3% in the past 3-4 years, and
they have operations in the U.S and other locations. However, they are 40x
larger than Takeda.
Despite Takeda’s meager size, its growth in
retained earnings has been particularly impressive. In 2015, retained earnings
were just 205M, by 2017, it was 1B, and in 2019, it was 2.16B. At this rate of
growth, tangible book value will grow in proportion also, and bring in new
shareholder value.
Takeda stands at a market capitalization of
USD15M with USD5M in profits. If we take USD10M into account, it would still be
5x earnings. With such a small size, growth is inevitable, but how reliable is
this growth? Takeda has been cautious and has purposely concluded their sales
partnership with Amada where they were their OEM for steel saws.
Takeda originally expected to roll out
full-scale steel processing machines for overseas markets by May 2020. Due to
the Corona virus, this launch date may be delayed. In Southeast Asia,
infrastructure development is growing faster than Japan— an essential market to
Takeda.
I think Takeda, at this price, is a steal;
it comes with reasonable growth, low double digit ROIC, but is flawed in its
own ways as mentioned in this article. I would only load up on it if you don’t
see other opportunities.
This is certainly not a “sure thing,” but with
a quick ratio of 1.2, and a multiple of 3-5x earnings, Takeda does have more
upside than downside. Debt to equity was 1 to 1, now it is at a safe 25%.
Sources:
Takeda Annual Reports, quarterly earnings,
and announcements
Amada annual reports
Customers/Distributors
Matsumoto Sangyo— https://mac-exe.co.jp/company/
Amada—
http://www.amada.co.jp/
Yamazen—
http://www.yamazen.com/
No comments:
Post a Comment