Thinking Points

  • Tomita (TSE: 8147) is a trading company specializing in industrial machinery and tools with a rich 100+ year history.
  • Although the company’s performance is cyclical, Tomita remains healthy and profitable over the long run, effectively free of debt.
  • Moreover, the company holds a significant amount of investment securities (~36% of current market cap) and its Tokyo land carries a book value significantly below market.
  • At today’s 971 yen per share price, the company trades for 81.7% of adjusted NCAV with a negative enterprise value of -1,064 million yen ($9.6 million USD).
  • Investors can expect to gain a three year investment CAGR of 24%, inclusive of dividends, and exclusive of the company’s Tokyo real estate.

Introduction

Tomita (TSE: 8147) is a trading company specializing in industrial machines and tools. With a history extending over 100 years, the company has a wide reach with offices in ten countries. Tomita operates through four segments which are categorized by regions:

Source: Company filings


Over the last decade, Tomita successfully expanded its business globally as Japanese companies moved manufacturing operations outside of Japan. In 2018, Japan revenues accounted for 64% compared to 77% in 2008.

The business & environment

Tomita was founded in 1911 by Sojiro Tomita as a small retailer of imported tools in Tokyo (Ginza). In 1919, as the business expanded, the company was converted from a sole proprietorship to a corporation (Tomita Machinery). Going into World War II, however, imports decreased significantly and operations practically shutdown. Meanwhile, Sojiro recognized the increasing demand for domestic tools. In 1943, he founded Tomita Tools which manufactured and sold tools domestically.

Source: Tomita website


Shortly after the war, the two companies merged and opened a sales office in Osaka. In the following decades, the company opened offices across Japan. The company opened its first overseas office in the US in 1984. In the 1990s, the company expanded into the UK, Thailand, and Canada. Then in the 2000s, Tomita opened offices in China and Indonesia. Over the last decade, Tomita continued with its international expansion, setting up offices in Vietnam, Mexico, and India.

Today, the company operated in 10 countries with 30 total offices. Even within industrial machinery, Tomita focuses on offering machine tools, forging presses, machine control systems, and tools. According to its 2018 filings, revenues are split evenly between machinery and tools.

Source: Tomita website

In the last ten years, the company increased its overseas revenue exposure:

Source: Company filings


Tomita’s Japan revenues has not recovered to pre-crash levels, however, many Japanese companies have shipped out manufacturing operations overseas. Today, Asia and N. America account for a much larger portion of revenues than it did ten years ago.

In dealing with industrial machinery and tools, Tomita’s business is dependent on a healthy capital investment environment. During 2010, annual revenues dropped by 56% amid the global financial crisis. Although in recent filings, Tomita mentions its efforts to increase market share for repeatedly purchased tools, it is highly likely that company performance will decline in a similar fashion if another global financial crisis occurs.

Aside from a weak capital investment environment, Tomita manages to generate profits:

Source: Company filings


Besides its specialization and domain specific knowledge in industrial machinery and tools, Tomita does not have observable competitive advantages.

For fiscal 2019, Tomita management guided 23,900 million yen ($216.2 million USD, +0.2% YoY) in revenues and 970 million yen ($8.8 million USD, +4% YoY) in operating income. As of Q2 2019, company performance is considerably ahead of guidance with 11,935 million yen ($108 million USD, +5.8% YoY) in revenues and 621 million yen ($5.6 million USD, +24.7% YoY) in operating income.

Shareholders

As of Q2 2019 (ending September 30th, 2018), Tomita had 6,158,000 shares issued and 610,286 shares in treasury, putting outstanding shares at 5,547,714.

Here are the major shareholders:

Source: Company filings, Nikkei


Tomita Kyoeikai is a group that consists of Tomita customers and vendors. No documentation was available on Gintomi Kosan, but this is likely the Tomita family’s fund. Assuming this is correct, the Tomita family owns 24.6% of outstanding shares.

The company offers no management equity compensation plans.

Financials & Valuation

  • Tomita is a 100+ year old trading company specializing in industrial machines and tools.
  • Over the last several decades, the company expanded overseas. Today, Tomita has 30 offices in 10 countries.
  • Although the company reassessed its land holdings in 2002, its Tokyo land carries a book value significantly below market prices.
  • At today’s 971 yen per share price, Tomita trades at an adjusted 81.7% NCAV with a negative enterprise value of -1,064 million yen ($9.6 million USD).
  • Investors can expect to gain a three year investment CAGR of 24% inclusive of dividends without accounting for the company’s land holdings.

Tomita is an established trading company specializing in industrial machines and tools. Over the last several decades, its focus has been on overseas expansion. Today, the company continues to open offices globally and operates 30 offices in 10 countries.

With the focus on industrial machinery and tools, Tomita’s business is highly dependent on a healthy capital investment environment. During the global financial crisis, the company’s business performance declined significantly. In 2010, Tomita recorded a 56% decline in revenues as well as operating losses. Although the company mentions its efforts to increase market share for repeatedly purchased tools in its filings, it is highly likely that business performance will decline in similar fashion if another global financial crisis occurs. Hence, the company’s performance is cyclical.

At today’s 971 yen per share price, Tomita trades at 0.8x EV/EBIT and 120% of NCAV with a market cap of 5,387 million yen ($48.7 million USD). However, there are two key adjustments that are required: investment security holdings as cash & equivalents and Tokyo real estate market rates.

As of Q2 2019, Tomita had 4,953 million yen ($44.8 million USD) in cash & equivalents, 12,142 million yen ($109.8 million USD) in current assets, and 1,045 million yen ($9.5 million USD) in total liabilities. Additionally, the company had 1,930 million yen ($17.5 million USD) in investment securities. When adjusting for investment securities, Tomita trades at 81.7% NCAV with a negative enterprise value of -1,064 million yen ($9.6 million USD).

Since its founding in 1907, Tomita operated out of Ginza (Chuo ward, Tokyo). Today this is premium real estate. Although the company reassessed its property values on its books in 2002, the company’s Ginza real estate is considerably undervalued relative to the Japanese government’s standard price benchmark. Here is how Ginza real estate fared over the last two decades:

Source: Tochidai.info, adjusted by Kenkyo Investing


Since 2002, Ginza property prices have more than tripled. On 2018 filings, Tomita has its Ginza headquarters land listed with a book value of 788 million yen ($7.1 million USD) for 184 square meters of land, or 4.3 million yen per square meter. Today, the Ginza area average square meter price is 26.1 million yen per square meter, more than 6 times of what is recorded on the books. Kenkyo estimates are more modest, assigning a market value of 1,941 million yen ($17.6 million USD) based on selective nearby land values. Still, the difference between book value and market prices are equivalent to 21% of Tomita’s current market cap.

Using 10 year average business performance as normalized performance, Tomita’s normalized revenues is 18,747 million yen ($169.6 million USD) and its normalized operating income is 590 million yen ($5.3 million USD). Assuming fair value EV/EBIT multiple of 3x, cash accumulation (~20% of operating income), and dividend payout ratio of 15%, Tomita’s shares should be worth 1,849 yen per share including dividends. This is equivalent to a three year investment CAGR of 24%. This valuation does not account for the company’s Ginza land holdings.

The bottom line

Tomita is a trading company specializing in industrial machinery and tools with a rich 100+ year history. Although the company’s performance is cyclical, Tomita remains healthy and profitable over the long run, effectively free of debt. Moreover, the company holds a significant amount of investment securities (~36% of current market cap) and its Tokyo land carries a book value significantly below market. At today’s 971 yen per share price, the company trades for 81.7% of adjusted NCAV with a negative enterprise value of -1,064 million yen ($9.6 million USD). Investors can expect to gain a three year investment CAGR of 24%, inclusive of dividends, and exclusive of the company’s Tokyo real estate.


Kenkyo Investing
Kenkyo Investing

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