Thinking Points

  • Daiken (TSE: 5900) is an established mid-tier construction material maker with a small real estate arm.
  • While the operating business faces headwinds, the company maintains a healthy cash position with no debt.
  • Moreover, the company has accumulated a significant amount of assets over the course of its 95 year history, which aren’t reflected on the balance sheet.
  • At today’s share price of 605 yen, investors can expect an investment CAGR of between 7.4% and 12.1%. Depending on how the operating business performs, the company may trade higher.

Introduction

Founded in 1924, Daiken is a long-standing mid-tier construction material maker mainly manufacturing external trims, hardware, and metal fittings. Over its 95 year history, the company has grown to own and operate seven factories across Japan. Additionally, the company has a small real estate arm. Today, the company reports through two segments: Construction materials and real estate. Construction materials revenue is further broken down into four subsegments.

Source: Company filings


The business & environment

Segment description

Daiken started off by making sliding door hangers and curtain rails. Now the company makes a variety of products including storage sheds, multiplex mailboxes, door locks, awnings, coping, banner holders, service hatches, sliding door rails, door retractors, bicycle parking roofs, propane tank storage units, and more.

Source: Company website


The company further splits its construction materials segment revenues into four subcategories: Hardware, external trims, exterior, and other. Here is how revenues have fared over the last ten years:

Source: Company filings


Unfortunately, the company doesn’t disclose margins by these subcategories. With that said, recent operating performance makes it clear that the company is in a difficult place. The company has maintained full-year operating profits for over ten years, however, in the first two quarters of fiscal 2019, Daiken recorded operating losses. The company explains in its filings that rising raw material, shipping, and labor costs combined with increased price competition has been pressuring margins.

In fact, in fiscal 2018, production costs reached a ten year high as a percentage of revenues. While cost of goods sold isn’t broken down in quarterly reporting, it’s safe to assume that the high cost high competition environment has intensified during the first half of fiscal 2019.

Here are two different breakdowns of historical production costs:

Source: Company filings
Source: Company filings


While it is fair to expect raw material prices to fluctuate, it is highly unlikely that shipping costs will be reduced. Furthermore, without productivity improvements, Daiken’s labor cost will continue to increase.

The rise in shipping and labor costs, in general, have everything to do with Japan’s record-level tight labor market. Lead by Yamato Holdings (TSE: 9064), the largest shipping company in Japan, just about every shipping company is raising rates. Even with favorable raw material prices, Daiken’s operating performance will likely come in at levels lower than the past.

The key raw materials for Daiken products are aluminum, stainless steel, and steel. Interestingly, all of the company’s business is domestic. A strong yen is good for Daiken.

Management guidance

Daiken management originally guided for 11,000 million yen ($101 million USD, +3.1% YoY) in revenues and 400 million yen ($3.7 million USD, +2.2% YoY) in operating income, with only 20 million yen ($185K USD) of operating income projected for H1 2019. In September 2018, shortly before H1 2019 reporting, Daiken adjusted its guidance downard to 10,800 million yen ($99.5 million USD) in revenues and 280 million yen ($2.6 million USD) in operating income. The company proceeded to report -26 million yen (-$240K USD) in operating losses for H1 2019.

Shareholders

As of Q2 2019 (ending August 31st, 2018), Daiken had 5,970,480 shares issued and 97,932 shares in treasury, putting outstanding shares at 5,872,548.

Here are the major shareholders:

Source: Company filings & Nikkei


Youichi Fujioka is the CEO and all the Fujiokas are part of the founding family.

Daiken has no equity compensation plans.

Financials & Valuation

  • Though Daiken’s operating business started generating operating losses, the company is still in exceptional financial health with a net cash balance of 1,118 million yen ($10.3 million USD), which is equivalent to 31.4% of the company’s market cap.
  • Over the course of its 95+ year existence, the company has accumulated seven factories along with the land that these factories sit on.
  • By ballpark estimates, the land under Daiken’s seven factories, Osaka headquarters, and rental property are recorded on the balance sheet at about a third of the current market price.
  • Assuming Daiken trades to 100% NCAV over the next 5 to 8 years, investors can expect an investment CAGR of between 7.4% and 12.1%. Depending on how the operating business performs, the company may trade higher.

Daiken is debt-free with an equity to asset ratio of 0.81. Moreover, it has a strong net cash balance of 1,118 million yen ($10.3 million USD), which is equivalent to 31.4% of the company’s market cap at today’s 605 yen per share price.

While the quality of Daiken’s operating business is mediocre at best, the company’s land holdings is attractive. Using Tochidai.info to estimate market price, Daiken’s land for its seven factories, Osaka headquarters, and rental property carry a book value of about one-third the market price.

Source: Company filings, Tochidai.info, Google, and others


Keep in mind, the list above does not contain all of Daiken’s land. The company also has land where its one welfare facility and twelve sales offices are, however, we weren’t able to identify the locations of these facilities to estimate market prices. With that said, the list does cover the bulk of Daiken’s holdings.

At 605 yen per share, Daiken’s market cap is 3,553 million yen ($32.7 million USD). The difference between the book value and market price of Daiken’s land is 3,419 million yen ($31.5 million USD). Seeing that management was considering selling the Chiba factory back in 2011/2012, we can assume the company is still open to this option. The factory has since been used for production and logistics.

When Daiken management was looking into selling the Chiba factory, it incurred impairment charges to better reflect the planned sale price. Since selling developed land takes considerable time and incurs other costs, we can write the total market price down to 2,300 million yen ($21.2 million USD), or about two-thirds of market price for conservative measures.

In addition to the net cash of 1,118 million yen ($10.3 million USD) and land worth 2,300 million yen ($21.2 million USD), Daiken has 779 million yen ($7.2 million USD) in equities, mostly of its customers/vendors. This adds up to 4,197 million yen ($38 million USD), more than the company’s market cap of 3,553 million yen ($32.7 million USD).

The bulk of non-cash current assets are in receivables and inventory. While inventory-to-revenue has trended upward from 0.11 back in 2011 to 0.14 in the last quarter, inventory is still moving and it is unlikely that the company will incur material writeoffs.

To be sure, with the operating business going from generating thin margins to now losses, it’s difficult to see investor sentiment shifting positively. Using common retail metrics like P/E, the company trades 20x on a trailing twelve month basis, making the company look expensive. With that said, Daiken holds significant assets, which should give investors ample protection.

Assuming Daiken trades to 100% NCAV over the next 5 to 8 years, investors can expect an investment CAGR of between 7.4% and 12.1%. Depending on how the operating business performs, the company may trade higher.

The bottom line

Daiken is an established mid-tier construction material maker with a small real estate arm. While the operating business faces headwinds, investors can take comfort in Daiken’s healthy cash position. Moreover, the company has accumulated a significant amount of assets over the course of its 95 year history, which aren’t reflected on the balance sheet. At today’s share price of 605 yen, investors can expect an investment CAGR of between 7.4% and 12.1%. Depending on how the operating business performs, the company may trade higher.


Kenkyo Investing
Kenkyo Investing

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