Thinking Points

  • OYO Corporation (TSE: 9755) is the largest geological surveying and consulting company in Japan, focused on infrastructure maintenance, disaster prevention, environmental, and energy related areas.
  • With a highly specialized offering and a global reach, the company’s operating business, though susceptible to cyclical downturns, is adequately healthy.
  • As a part of its 2018-2020 medium term plan, the company plans to spend 20,000 million yen ($179 million USD) for R&D, capital investment, and M&A.
  • At today’s 1,063 yen per share price, OYO Corporation trades at 56.4% of adjusted NCAV with a market cap of 27,750 million yen ($248 million USD).
  • Investors can expect an investment CAGR of between 7.4% and 16.3%, exclusive of dividends, over the next 5 to 8 years.

Introduction

OYO Corporation (TSE: 9755) is the largest geological surveying and consulting company in Japan. Additionally, the company sells various measuring equipment for geological surveying, seismic observation, geophysical exploration, and more. OYO operates through four segments: Infrastructure & Maintenance, Disaster Prevention, Environmental, and Energy.

Source: Company filings


The above four segments were newly implemented in fiscal 2018 as a part of the OYO’s 2018 – 2020 medium term plan. According to the plan, the company plans to grow its business with solutions focused offerings. Additionally, OYO is researching subsurface three dimensional visualization technology and is open to growth through M&A.

The business & environment

OYO Corporation was founded in 1957 as a geological surveying company. The company was a beneficiary of Japan’s economic miracle, experiencing rapid growth as the Japanese government proactively increased public spending on infrastructure projects from post-war reconstruction through the late 1980s.

The first 15 years of business was a busy time for OYO. Originally founded in Tokyo, the company quickly expanded into other major metropolitan areas in Japan including Osaka, Nagoya, Fukuoka, and Sapporo. In addition to that, OYO obtained permits for construction, surveying and construction consulting. In 1983, the company setup a US subsidiary OYO Corporation USA and started manufacturing and selling geophones, marking its entrance into the equipment business.

In 1986, OYO Corporation completes its first M&A deal, acquiring Tohoku Boring in Japan. The company then made its first foreign M&A deal in 1989, acquiring undersea search and survey equipment maker Klein & Associates. The company was subsequently sold to L-3 Communications (NYSE: LLL) in 2003.

OYO Corporation further expanded its footprint, making the following acquisitions and joint ventures:

Source: Company filings, various


As an aside, OYO Corporation listed its subsidiary OYO Geospace Corporation on NASDAQ (now Geospace Technologies [NASDAQ: GEOS]).

Although the company now operates with the Infrastructure & Maintenance, Disaster Prevention, Environmental, and Energy segments, the segments were organized recently in 2018 and can only be traced back to 2017. Here’s the previous segment revenue history:

Source: Company filings


Here are 2017 & 2018 revenues by the new segment organization:

Source: Company filings


Infrastructure & Maintenance – provides infrastructure aging research, maintenance management systems, and research, design, and measurement services for disaster resistant infrastructure construction.

Disaster Prevention – offers damage estimation for earthquakes, tsunamis, and fire for the private and public sectors.

Environment – offers consulting services related to environmental monitoring, soil and groundwater contamination prevention, asbestos removal, and waste disposal. This segment is involved in the Fukushima Nuclear Power Plant projects.

Energy – provides specialized geological surveying consultation, methane hydrate research & development, and renewable energy support services.

So far, the Infrastructure & Maintenance and Environment segments have been the income generators:

Source: Company filings


The segment reorganization came as a part of OYO’s most recent medium term plan spanning 2018 through 2020. According to the plan, the company aims to grow its business through solutions-focused offerings while further researching subsurface three dimensional visualization technology. Additionally, it plans to continue its M&A strategy. Through 2020, the company plans to spend 6,000 million yen ($53.7 million USD) on research & development, 6,000 – 7,000 million yen ($53.7 – 62.7 million USD) on capital investment, and 7,000 million yen ($62.7 million USD) on M&A. The company is targeting 65,000 million yen ($582 million USD) in revenues and 10% operating margins by fiscal 2020.

In an interview published on the company website (Japanese), CEO Masaru Narita talked about various ways of incorporating modern technologies to its existing businesses. For example, if the company could three dimensionalize the ground without any excavation, this would drastically improve cost effectiveness and shorten construction schedules. According to Masaru, the company is already able to do this for depths up to 6 meters, but is pushing to expand capabilities to 10 meters, 20 meters, and beyond.

For fiscal 2019, OYO is guiding for 49,500 million yen ($443 million USD) in revenues and 1,900 million yen ($17 million USD) in operating income. The company is expecting further growth out of its Infrastructure & Maintenance segment as the Japanese government plans to increase public works spending for 2019.

Shareholders

As of Q4 2018 (ending December 31st, 2018), OYO Corporation had 27,582,573 shares issued and 1,469,573 shares in treasury, putting outstanding shares at 26,113,000.

Here are the major shareholders:

Source: Company filings & Nikkei


Fukada is one of the two founding families. Touyama is the other one. Both families are no longer involved in management and don’t have board seats.

There are no equity compensation plans for management or unexercised stock options.

Financials & Valuation

  • OYO Corporation is the largest geological surveying and consulting company in Japan, with offerings focused on infrastructure maintenance, disaster prevention, environmental, and energy related areas.
  • The company offers highly specialized services, extending its reach globally in North America, Europe, and China through a series of M&A deals over the last four decades.
  • With its 2018-2020 medium term plan, OYO is aggressively planning to spend 20,000 million yen ($179 million USD) for R&D, capital investment, and M&A.
  • At 1,064 yen per share, OYO Corporation trades at 56.4% adjusted NCAV with a market cap of 27,750 million yen ($248 million USD).
  • Investors can expect an investment CAGR of between 7.4% and 16.3% over the next 5 to 8 years, exclusive of dividends.

Founded in 1957 as a geological surveying company, OYO Corporation has grown into Japan’s largest geological surveying and consulting firm. Today, the company is focused on offering services in infrastructure maintenance, disaster prevention, environmental, and energy related areas. Over the years, the company has extended its reach not just across Japan, but also in N. America, Europe, and China through M&A.

With a highly specialized offering, the company has successfully established itself as a strong player in surveying. To be sure, the company isn’t without competition, with companies like Kawasaki Geological Engineering (TSE: 4673) and Kitac Corporation (TSE: 4707) pursuing similar infrastructure projects, and Kawasaki in particular, conducting R&D in three dimensional ground visualization technologies as well.

Still, OYO Corporation remains the largest player with a global reach. Although the company’s performance is dependent on healthy public infrastructure spending and corporate investment environment, OYO Corporation posted losses for one fiscal period during the 2008 – 2010 global financial crisis and returned to profitability the following year.

Source: Company filings & GuruFocus


The company’s balance sheet is more than healthy, with an equity to asset ratio of 0.82 and a net cash position. At 1,064 yen per share, OYO Corporation trades for 64.2% NCAV with a market cap of 27,750 million yen ($248 million USD). Adjusted for 6,017 million yen ($53.9 million USD) of investment security holdings, OYO Corporation trades at 56.4% of NCAV.

Like many long-established Japanese companies, OYO Corporation also has significant land holdings. On the balance sheet, this amounts to a book value of 6,251 million yen ($56 million USD). Upon assessing the 2,857 million yen ($25.6 million USD) of land holdings further broken down in the 2017 long form filings (2018 not available as of this writing), the land is booked at around current market prices.

Overall, with OYO Corporation’s specialized offerings and global presence, the company has a healthy future outlook, aside from cyclical downturns. Hence, it is reasonable to assume that OYO Corporation will trade at or above 100% adjusted NCAV over the next 5 to 8 years. This translates into an investment CAGR of between 7.4% and 16.3%, exclusive of dividends, with a purchase price of 1,063 yen per share.

Source: Kenkyo Investing


The bottom line

OYO Corporation is the largest geological surveying and consulting company in Japan, focused on infrastructure maintenance, disaster prevention, environmental, and energy related areas. With a highly specialized offering and a global reach, the company’s operating business, though susceptible to cyclical downturns, is adequately healthy. At today’s 1,063 yen per share price, OYO Corporation trades at 56.4% of adjusted NCAV with a market cap of 27,750 million yen ($248 million USD). Investors can expect an investment CAGR of between 7.4% and 16.3%, exclusive of dividends, over the next 5 to 8 years.


Kenkyo Investing
Kenkyo Investing

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