Thinking Points

  • Tenox (TSE: 1905) is a reputable construction company specializing in foundation work. Since its founding, the company has obtained several patents in foundation solution methods.
  • Recent business performance has been pressured by rework costs on a large scale project from late 2017, however, the company still generates a healthy profit and the rework is now complete and fully expensed as of Q3 2019.
  • Much like any other construction company, Tenox’s performance is dependent on healthy public investment and economy. As long as this environment continues, Tenox’s business performance is likely to improve considerably going forward.
  • At 807 yen per share, Tenox trades at 66% of NCAV (adjusted for options) with a market cap of 5,666 million yen ($51.2 million USD).
  • Investors can expect an investment CAGR of between 5.4% and 12.8% over a 5 to 8 year time frame.

Introduction

Tenox (TSE: 1905) is a construction and construction materials company specializing in foundation work and materials. The company is most known for its proprietary Teno Column foundation solution, a cheaper, safer, and quicker way of building a foundation. Today, Tenox operates through three segments: Construction, Construction Consulting, and Other.

Source: Company filings


In its earnings presentations, Construction segment revenues is further broken down into foundation improvement, pile construction, and other. Presumably, the other subcategory consists of construction material sales and equipment leasing. The Other segment, mainly consists of rental real estate revenues.

The business & environment

Tenox started out as a construction materials distributor for Asahi Kasei in 1970, mainly selling and constructing concrete piles. Seven years later in 1977, the company obtained its first patent: The Nakahori pile construction method. During the same year, it started a construction equipment leasing business.

By 1987, Tenox expanded into all major metropolitan areas in Japan and obtained a patent for its famed Teno Column foundation reinforcement method. The company continues to develop proprietary methods for pile construction and foundation reinforcement today, and in 2015, expanded its business overseas into Vietnam.

The company rarely appears in interviews or the public spotlight in general. Hence, there isn’t a whole lot of qualitative information available. With that said, Tenox has remained consistent in researching new and more efficient ways to build a foundation, then obtaining patents.

Aside from 2010-2012, when private investment dropped noticeably (2010-2011) and then public investment declined (2012), revenue performance has remained consistent:

Source: Company filings, adjusted for segment reorganization in 2012 and 2014


Source: Company filings


Historically, Tenox’s revenues have generally been split evenly between the private and public sectors. As the Construction segment is the largest revenue source by far, the company provides a revenue breakdown. Keep in mind, the figures don’t match up cleanly with the company filings. This is mainly because 2008-2010 & 2014-2018 figures were presented on a non-consolidated basis (reporting company) while the 2011-2013 figures were presented on a consolidated basis.

Source: Historical company presentations


What we can observe from Tenox’s past performance is that the company is profitable as long as public investment and economy is healthy.

Operating performance in 2018 declined considerably compared to recent history. This is mainly due to repair work on a large scale foundation project. Originally, the company guided for 1,200 million yen ($10.8 million USD) in operating income for 2018, but adjusted this figure down to 580 million yen ($5.2 million USD) after announcing the problem in December 2017 (Japanese).

The exact cost of the problem was not revealed as Tenox’s contract with the general contractor included a confidentiality agreement. According to a February 2019 release, the two companies came to an agreement on how much cost each company will shoulder (Japanese). This cost was included in the 2019 guidance released on May 2018, and fully accounted for as of Q3 2019.

As a reference, the company guided for 20,000 million yen ($181 million USD, -2.2% YoY) in revenues and 900 million yen ($8.1 million USD, +20.2% YoY) in operating income for 2019.

Shareholders

As of Q3 2019 (ending December 31st, 2018), the company had 7,694,080 shares issued and 780,374 shares in treasury, putting outstanding shares at 6,913,706.

Here are the major shareholders:

Source: Company filings & Nikkei


The 2018 filings showed 131,300 shares in unexercised options. The company issued another round of options in July 2018 for 22,800 shares. There have been no disclosures about retiring treasury shares or stock options. Meanwhile, the company repurchased 110,000 shares during Q2 2019. We estimate that there are ~48,000 shares in unexercised options as of Q3 2019. Additionally, the company repurchased 130,000 shares during Q4 2019.

Financials & Valuation

  • Tenox is a reputable construction company specializing in foundation work. Most known for the Teno Column foundation solution, the company has obtained several patents in foundation solution methods over the last several decades.
  • Recent business performance has been pressured by rework costs on a large scale project from late 2017, however, the company still generates a healthy profit.
  • Much like any other construction company, Tenox’s performance is dependent on healthy public investment and economy.
  • At 807 yen per share, Tenox trades at 66% of NCAV (adjusted for options) with a market cap of 5,666 million yen ($51.2 million USD).
  • Investors can expect an investment CAGR of between 5.4% and 12.8% over a 5 to 8 year time frame.

Since its founding in 1970, Tenox has specialized in foundation related construction work and material distribution. The company, most known for its Teno Column foundation solution, has researched and developed various patented foundation solution methods.

In late 2017, the Tenox announced that it would need to perform rework on a large scale foundation project. This resulted in the company adjusting its operating income guidance lower. The exact cost of the rework was not revealed, but has affected 2019 performance as well. According to a February 2019 release, the full cost of the rework was accounted for as of Q3 2019.

Put another way, as long as the economy and public investment environment remain healthy, Tenox is set to deliver stronger normalized operating performance going forward.

Unlike some of the long established net net construction companies, Tenox does not own a significant amount of land. Although the land its Tokyo equipment center is located on appears undervalued by about 300 million yen ($2.7 million USD), it does not have a material effect on the valuation of the company.

At 807 yen per share, Tenox trades at 66% of NCAV (adjusted for options) with a market cap of 5,666 million yen ($51.2 million USD). There are no notable adjustments needed. Given that Tenox generates industry average margins, it’s fair to say the operating business quality is average. With that said, recent margins have been pressured downward due to the rework problem, and it is likely that operating margins will improve going forward as long as the economy remains healthy.

Hence, it’s fair to assume that Tenox is likely to trade at or above NCAV. Investors can expect an investment CAGR of between 5.4% and 12.8%, with a decent probability that the share price will appreciate in the near term due to the rework no longer affecting business performance.

Source: Kenkyo Investing estimates


In looking at an asset based valuation, it’s also worth noting that the company has paid gradually increasing dividends of between 12 and 29 yen per share annually in the last 5 years. With this in mind, the company should have a dividend yield between 1.5% and 3.6%. The recent share repurchases are also a move in the right direction.

The bottom line

Tenox is a reputable construction company specializing in foundation related work and material distribution. Over the years, the company has developed and patented several foundation solution methods. More recently, however, business performance has been pressured downwards as Tenox needed to rework a large scale project. Now that the rework is fully complete and expensed, the company ought to perform better going forward as long as the economy remains healthy. With this in mind, investors can expect an investment CAGR of between 5.4% and 12.8% 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.