Thinking Points
- Nihon Decoluxe’s (NGO: 7950) story is profitable, but as boring as it gets.
- Revenues have only slightly increased over the past 10 years while EBIT delivered 20% CAGR.
- At 0.37x EV/EBIT and a 3.5+% dividend yield, it’s hard to go wrong with Nihon Decoluxe.
Today’s company, Nihon Decoluxe (NGO: 7950), is actually traded on the Nagoya exchange. The company’s construction materials segment manufactures and sells melamine boards, phenolic resin laminate for printed circuit boards, and chemical anchors. Additionally, Nihon Decoluxe has a real estate segment that rents office space. Frankly, there is nothing explosive, lively, or flashy about Nihon Decoluxe. It’s definitely not a business I would normally cover, but the price combined with reasonable business performance made me want to take a closer look. From what I can tell, 100% of company revenues are generated in Japan.
Description of business
- Melamine Boards (71% of FY 2017 sales)
Melamine boards are materials often used in kitchen counters, desks, doors, etc. Here’s an example of one of the products, “Bio-marble”, from Nihon Decoluxe’s website:
- Phenolic Resin Laminate (12% of FY 2017 sales)
Printed circuit boards are the green boards that you see in all electronics:
There are many ways to produce this, one of which uses phenolic resin laminate.
- Chemical Anchor (13% of FY 2017 sales)
Anchor bolts are used in construction to attach things to base materials (concrete, wood, masonry, etc). Typically, a hammer drill is used to open a hole, then an anchor bolt is inserted. There are broadly two types of anchors: mechanical and chemical. Without getting into technical details, mechanical anchors are generally cheaper and less prone to installer error. In contrast, chemical anchors are more sturdy, but prone to installer error and require more time for curing. If you’re interested, you can brush up on the details here. In any case, Nihon Decoluxe manufactures chemical anchors.
- Real Estate (4% of FY 2017 sales)
This part is way more straightforward. The company owns 3 properties, but does not disclose much information about them. At least one is located in Tokyo.
Business Performance
It feels strange jumping right into business performance. Truth is, I could not find a whole lot of information about Nihon Decoluxe. There is very little info available even in Japanese. I did catch that Nihon Decoluxe has the highest market share in chemical anchors in Japan, but with no reliable sources.
The only real information I was able to obtain were product/industry information and mandatory filings. That’s not necessarily a bad thing though.
I think it’s safe to say that the Melamine board business is dependent on construction. Similarly, the chemical anchor business is also dependent on construction, but more for industrial and infrastructure projects. In contrast, the phenolic resin laminate business is exposed to a more export dependent electronics industry.
As an investor, the biggest long term risk here is probably the 100% Japan generated revenues, which is heavily pegged to construction. Perhaps industrial and infrastructure construction may increase. However, it’s difficult to see how a population decline can be good for Nihon Decoluxe’s business.
Despite some of the macro concerns though, Nihon Decoluxe has delivered stable top line figures with improving margins. Over the past 10 years, revenues grew at a 0.9% CAGR pace while EBIT grew at a 20% CAGR. Much of the EBIT growth came from margin improvement as gross margins improved from 29% to 38% and operating margins improved from 2% to 12% during the same 10 years. That said, 2008 was a difficult year for almost everybody.
Valuation
Net cash is 3,746 Million Yen. NCAV is 6,840 Million Yen. Market cap is 6,920 Million Yen, or 101% NCAV. This is the type of company that Ben Graham was looking at back when investors had to request financials to be mailed to their homes.
On an EV/EBIT basis, Nihon Decoluxe trades at 0.37x (Guru Focus). Historically, the company has mostly traded at negative EV/EBIT, with the exception of 2015 and this year. For value focused investors looking for catalysts: Unfortunately, I can’t seem to identify any. That said, dividend yield is at 3.6% on a 30~40% payout ratio. It seems to me like a meteor striking Nihon Decoluxe’s 2 factories and 3 properties is already priced in.
Overall, the story lacks excitement, but I think it’s hard to go wrong with Nihon Decoluxe. Of course, there are little to no growth prospects. Still, the company generates a healthy stream of profits and consistently delivers dividends. Recently, the company changed its dividend policy to payout 30~40%. Its previous policy only vaguely stated that dividends would be paid out according to business performance, but the company still paid out roughly 30~40% of net income most years.
Tearsheet
** Note: Tearsheet figures may vary from figures cited in the article as I retrieve data from multiple sources.
