Thinking Points

  • Newtech (TSE: 6734) is primarily a fabless manufacturer of computer storage products, and secondarily offers storage peripheral equipment, IT products from other companies, and maintenance services.
  • The end user of Newtech’s products are IT professionals. Revenues come from two main sales channels: System integrators and direct (i.e., end user). The company historically generates higher margins when sales mix for its storage products are strong.
  • With that said, computer storage products are increasingly becoming a commodity. Overall, the company has a small scale medium quality operating business which has generated considerably stronger operating performance recently as compared to the last ten years.
  • At today’s price of 818 yen per share, Newtech trades at an adjusted 1.7x EV/EBIT with an adjusted enterprise value of 373 million yen ($3.4 million USD) and a market cap of 1,568 million yen ($14.2 million USD).
  • Investors are best advised to remain cautious as operating performance can quickly decline with external factors. At 620 yen per share, or 0 adjusted enterprise value, however, Newtech would be worth a closer look.

Introduction

Newtech (TSE: 6734) is primarily a fabless manufacturer and seller of external storage devices for computers. Secondarily, it offers storage peripherals, computer related products, and maintenance services. The company operates through a single segment, but categorizes revenues into four categories:

Source: Company filings


Newtech’s customers are system integrators and IT professionals. It’s storage products are focused on mid-capacity (several hundred gigabyte) RAID storage devices. Data backup devices are the key offerings for peripheral equipment. SCSI cards, data backup system software, and Storage Area Network (SAN) switches are the main IT products.

The business & environment

Newtech got its start in 1982 when founder Yasuhito Kasahara set the company up as a computer equipment manufacturer and seller. The company initially did not focus on storage devices, offering keyboards, workstations, floppy disks, and more. In 1997, Newtech became a Microsoft Solution Provider. Shortly thereafter, the company started manufacturing and selling its own storage devices.

Since releasing its own storage products, Newtech started focusing on storage and related accessories. In 2004, the company developed its own RAID controller, a device that manages RAID storage devices to ensure they work together seamlessly. In 2007, Newtech setup a joint subsidiary and started offering installation and maintenance services for storage devices and systems.

Although computer storage has changed and commoditized over the last few decades, Newtech has so far been able to stay ahead. Historically, the most common approach to store server data has been to directly attach storage devices to the server. With improved internet speeds and network systems, however, storage devices have increasingly become network oriented. This has lead to the rise of Storage Area Networks (SAN) and Network Attached Storage (NAS), both of which are supported by Newtech.

Today, the company offers storage products, peripheral equipment, IT products, and maintenance services to end users in key industries like surveillance, data centers, cloud services, and more. Interestingly, maintenance revenues isn’t as recurring in nature as some may expect:

Source: Company filings


Revenues have reverted back to pre global financial crisis level, however, the revenue mix has changed dramatically. In 2009, storage products accounted for 57.7% of revenues. Ten years later in 2018, storage products accounted for 74.2% of revenues.

For operating performance, the higher mix for storage products is a good thing. The reason for this is simple: Newtech designs and manufactures products under the storage and peripheral equipment revenue categories, which means higher margins. The IT product category consists of products purchased from other companies and sold by Newtech.

Source: Company filings


To be sure, Newtech does not have its own manufacturing facility. The company is a fabless maker with partnered manufacturers in and outside of Japan. Still, Newtech captures more margin when it is involved in the manufacturing process. And storage products have performed well over the last few years.

For fiscal 2019, Newtech guided for revenues of 3,000 million yen ($27.2 million USD, +10.1% YoY) and operating income of 216 million yen ($2 million USD, +0.6% YoY). Three quarters in, Newtech has recorded 1,904 million yen ($17.3 million USD, +7.1% YoY) in revenues and 118 million yen ($1.1 million USD, +1.2% YoY) in operating income. Newtech historically generates a higher level or revenues in the fourth quarter of each year.

Shareholders

As of Q3 2019 (ending November 30th, 2018), Newtech had 2,081,000 shares issued and 164,195 shares in treasury, putting outstanding shares at 1,916,805.

Here are the major shareholders:

Source: Company filings and Nikkei


Yasuhito Kasahara is the founder of Newtech. He remains involved as board chairman, but passed CEO responsibilities onto Hirofumi Yanase in 2016.

Kanamoto (TSE: 9678) is a construction equipment rental company based out of Hokkaido (northern Japan). Kanamoto has held Newtech shares since pre-IPO (2002).

Financials & Valuation

  • Newtech is primarily a fabless manufacturer of computer storage products, and secondarily offers storage peripheral equipment, IT products from other companies, and maintenance services.
  • The end user of Newtech’s products are IT professionals. Revenues come from two main sales channels: System integrators and direct (i.e., end user).
  • Historically, the company generates higher margins when sales mix for its storage products are strong. With that said, computer storage products are increasingly becoming a commodity.
  • At today’s price of 818 yen per share, Newtech trades at an adjusted 1.7x EV/EBIT with an adjusted enterprise value of 373 million yen ($3.4 million USD) and a market cap of 1,568 million yen ($14.2 million USD).
  • With a small scale medium quality operating business which has only performed particularly well over the last several years, investors are best advised to remain cautious at current prices. At 620 yen per share, or 0 adjusted enterprise value, however, Newtech would be worth taking a closer look.

Newtech was founded in 1982 as a computer equipment manufacturer and seller. Shortly thereafter, the company manufactured and sold its first computer storage product. From then on, the company narrowed its focus on computer storage products, becoming a fabless manufacturer, and secondarily offering storage peripheral equipment, IT products from other companies, and maintenance services.

The end user of Newtech’s products are IT professionals. The company reaches these end users either directly or through system integrators. Its products are used to support key industries like surveillance, data centers, cloud services, and more.

Newtech was not immune to the global financial crisis, with revenues declining steeply. Revenues have since recovered to pre-crisis level, however, revenue mix has changed dramatically. Storage products accounted for 57.7% of revenues in 2009. In 2018, it accounted for 74.2% of revenues. Unlike the IT product category, which are manufactured by other companies, storage products are designed by Newtech and manufactured by Newtech’s partners. Hence, Newtech captures a higher margin, which has led to recently improved operating performance.

The biggest risk for Newtech is a dramatic change in the computer storage space and the commoditization of computer storage. The company has been able to turn a profit for the most part besides a couple of years during and shortly after the financial crisis. Overall, Newtech has a medium quality operating business.

At today’s price of 818 yen per share, Newtech trades at 2.1x EV/EBIT with an enterprise value of 454 million yen ($4.1 million USD) and a market cap of 1,568 million yen ($14.2 million USD). As of Q3 2019 (ending November 30th, 2018), Newtech had 1,432 million yen ($13 million USD) in cash & equivalents, 2,305 million yen ($20.1 million USD) in current assets, 81 million yen ($734K USD) in investment securities, and 1,101 million yen ($10 million USD) in total liabilities.

Adjusted for investment securities, Newtech trades at 1.7x EV/EBIT. It’s important to keep in mind that operating income has trended considerably higher recently than it has over the last ten years. Additionally, Newtech has no notable fixed assets.

Assuming a normalized operating income of 53 million yen ($480K USD), which is the ten year average operating income between 2009 and 2018, Newtech’s EV/EBIT multiple would be around 7x. Fair value EV/EBIT multiple for a small scale medium quality business with no assets ought to be around 3x. With this in mind, investors must be highly familiar and confident in Newtech’s products in order to invest at current prices, as the company has only recently improved operating performance.

Investors are best advised to remain cautious about investing in Newtech at current prices. At 620 yen per share, however, the company will have 0 adjusted enterprise value, and would be worth another look.

The bottom line

Newtech is primarily a fabless manufacturer of computer storage products, and secondarily offers storage peripheral equipment, IT products from other companies, and maintenance services. The company has a small scale medium quality operating business which has generated considerably stronger operating performance recently as compared to the last ten years. Although the company currently trades at an adjusted EV/EBIT of 1.7x, investors are best advised to remain cautious as operating performance can quickly decline with external factors. At 620 yen per share, or 0 adjusted enterprise value, however, Newtech would be worth a closer look.


Kenkyo Investing
Kenkyo Investing

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