Thinking Points

  • Tomita Electric (TSE: 6898) is a manufacturer of Ferrite Cores and Coil Transformers, or magnetic components commonly used in electronics. Additionally, the company has a small rental real estate business.
  • The company’s core electronic component segment has been struggling for the better part of the last 15 years. Meanwhile, its real estate arm has softened the blow.
  • All that said, with significant cash and land holdings, Tomita’s balance sheet is still more than healthy.
  • Today, Tomita’s shares trade at 940 yen, or 44% of NCAV. While the company appears cheap, it’s difficult to imagine a positive shift in investor sentiment over the next several years.
  • Investors may see an investment CAGR between 7.7% and 12.5% if Tomita manages to reach sustainable breakeven operating performance.

Introduction

Tomita Electric (TSE: 6898) is a manufacturer of Ferrite Cores and Coil Transformers, or magnetic components commonly used in electronics. Though the company has a domestic production facility, its products are primarily manufactured in China. In addition, Tomita has a small rental real estate arm.

Source: Company filings


While Tomita is a respected leader in a niche industry, it faces stiff price competition. Despite efforts to reduce production cost, the company’s core Electronic Parts business has remained mostly unprofitable. Meanwhile, its Real Estate business has consistently turned profits.

The business & environment

The first ferrite compound was synthesized by Yogoro Kato and Takeshi Takei of the Tokyo Institute of Technology in 1930. Since ferrites are mostly made out of rusted iron, the costs are low. This lead to the founding of TDK Corporation (TSE: 6762) in 1935. Today, ferrites are categorized into two main types: hard and soft.

Hard ferrites have high coercivity, making them hard to demagnetize. These are commonly used in motors, refrigerator magnets, and speakers. Soft ferrites have low coercivity, making them easier to demagnetize. These are used in high frequency inductors, transformers, and microwave components.

Tomita’s expertise is in soft ferrites.

Source: Company website


Soft ferrites have ever-expanding applications, extending to technologies such as wireless power transfer, LiDAR (Light Detection and Ranging) systems, and RFID.

Competition is intense, however, with companies like TDK Corp, Hitachi Metals (TSE: 5486), FDK Corp (TSE: 6955, subsidiary of Fujitsu), Dexerials Corp (TSE: 4980), and JFE Ferrite (subsidiary of JFE Steel [TSE: 5411]) all producing similar products.

Without domain specific expertise, it’s hard to tell what the differentiating factors are between Tomita and its competition. And Tomita’s electronic parts business’ financial performance over the last decade or so supports this. Moreover, Tomita has noted increasing price competition as a factor in its filings over the last five years.

Source: Company filings
Source: Company filings


Thankfully, Tomita’s real estate business has helped soften the damage, consistently generating a profit. Still, the company produced net losses in 6 of the last 10 years.

For fiscal 2019, Tomita management originally guided for revenues of 1,631 million yen ($14.8 million USD, +10.1% YoY) and operating income of 48 million yen ($430K USD, +134.7% YoY). This was later adjusted down to 1,558 million yen ($14.1 million USD) in revenues and 13 million yen ($120K USD) in operating income in September 2018.

Shareholders

As of fiscal 2019 Q3 (ending October 31, 2018), Tomita had 816,979 shares issued and 157,447 shares in treasury, leaving outstanding shares at 659,532.

Here are the major shareholders:

Source: Company filings & Nikkei


There isn’t much information available about the founder of Tomita Electric. Presumably, the Kamitani family is the founding family, and Planning Kamiya is the family fund. “神谷” can be read as Kamitani or Kamiya.

The company offers no equity compensation.

Financials & Valuation

  • Tomita Electric’s operating business has been struggling for the better part of 15 years, near-consistently operating at a loss.
  • With that said, its small real estate rental business has steadily driven profits, softening the blow from the electronic component business, and may become a key driver for breaking even at the operating level.
  • Without an end in sight for the electronics component business, it’s best to assume the operating business carries negative value.
  • Tomita does own significant land, however, the company reassessed its land in 2002, making it less attractive than severely undervalued land holdings commonly seen in older net net companies.
  • Investors may see an investment CAGR of between 7.7% and 12.5% should Tomita reach sustainable breakeven operating performance.

In accordance to Japan’s land revaluation law passed in 1998, which allows but doesn’t mandate reassessment of land, Tomita reassessed its land holdings. While the book value of the land its headquarters sits on is still considerably under market, it’s not as undervalued as some of the net net companies we’ve covered previously.

Source: Company filings/website, Tochidai.info, author calculations


The addresses of company land is generally not listed on filings. Normally, this information is pulled from the company website. Since Tomita doesn’t have any of its rental properties listed on its website, we are unable to estimate what the market value of this land is. Seeing that Tomita sold its previous Tokyo office off in 2016, the company is probably open to letting go of its Osaka office in exchange for rental properties in its home prefecture of Tottori (where its rental properties are).

Currently, Tomita trades at 940 yen per share, or 44% of NCAV. The company is also debt free, with net cash per share at 406 yen. Still, it’s difficult to imagine a scenario where investor sentiment makes a positive shift in the next several years, especially with the ever-struggling core electronics component business and a still-small real estate business. While Tomita’s balance sheet is more than healthy, 80% NCAV in the next 5 to 8 years is probably an optimistic scenario.

Interestingly, Tomita shares spiked to about 2,800 yen per share late last year:

Source: Google


Tomita was mentioned as a Electric Vehicle stock on several blogs after word got around that the company developed a Ferrite core for electric vehicles.

It’s probably not best to expect much out of Tomita, but investors may see an investment CAGR between 7.7% and 12.5% if Tomita’s situation improves to breakeven in the next 5 to 8 years. There’s also the speculative chance that the market will get excited about Tomita as a EV or RFID name.

The bottom line

Tomita is a respected manufacturer of specialized electronic components. While operating performance for its core segment has suffered over the last 15 years, its small real estate arm has helped to soften the blow. Though the company holds attractive land assets, it’s difficult to envision a positive shift in investor sentiment over the near term. Investors may see an investment CAGR between 7.7% and 12.5% if Tomita manages to reach sustainable breakeven operating performance.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.