Thinking Points

  • Yotai Refractories (TSE: 5357) is an established refractory product maker with a particular strength in refractory bricks, holding the highest market share in Japan.
  • The company maintains a remarkably stable business, generating consistent profits throughout the 2008-2010 global financial crisis.
  • More recently, Yotai Refractories is delivering strong operating margins over the last several years, along with its peers.
  • At 520 yen per share, the company trades at 60% of adjusted NCAV with a market cap of 11,429 million yen ($102 million USD).
  • Investors can expect an investment CAGR of between 8% and 16.2%, inclusive of dividends, over the next 5 to 8 years.

Introduction

Yotai Refractories (TSE: 5357) is a mid-tier manufacturer and seller of refractory products which also offers furnace installation engineering. Its products and services are used by customers in high temperature industries like steel production, foundries, and glass manufacturing. The company reports through two segments: Refractory Materials and Engineering.

Source: Company filings


The company has remained profitable throughout the 2008-2010 global financial crisis. More recently, revenues and operating margins have improved along with other industry players. The business remains stable with close ties to Sumitomo Osaka Cement (TSE: 5232) and manufacturing operations in China.

The business & environment

Yotai Refractories was founded in 1936 by Osaka Cement (now Sumitomo Osaka Cement) to produce high-end refractory bricks. The company’s first two factories, Yoshinaga Factory and Hinase Factory, built in 1937 and 1938, respectively, are still in operation at the same location today. Over the years, Yotai supported the growth of Japan’s key industries like steel, non-ferrous metal, cement, and glass.

According to the company’s website, Yotai Refractories has the highest market share in refractory bricks in Japan. One of the highlights for the company is the use of its refractory bricks in building Tokyo Train Station, a historical landmark of Japan:

Yotai Refractories has remained focused on refractory products since its founding. In 1993, the company merged with Osaka Ceramics, inheriting its current materials research facility, Nagoya office, and two factories. Since then, its product offering expanded to include ceramics.

The company segment is separated into two categories: Refractory Materials and Engineering. Here are historical revenue figures:

Source: Company filings


Engineering revenues primarily consists of furnace design and installation. In recent years, Yotai Refractories has delivered strong operating performance, fueled by revenue growth:

Source: Company filings


Normalized historical operating margins are between 4 and 6 percent. The strong operating performance in recent years isn’t specific to Yotai, however, with competitors showing similar results.

Source: Nikkei, chart created by Kenkyo Investing


Competitor operating margins fared similarly to that of Yotai as well:

Source: Nikkei, chart created by Kenkyo Investing


Yotai Refractories tends to stay out of the media spotlight, with no management interviews publically available. Additionally, it’s website, found here, was designed in the early 2000s and is still in use today.

The company expects continued strong business performance, guiding for 25,000 million yen ($223 million USD, +3.2% YoY) in revenues and 3,600 million yen ($23.2 million USD, +1.1% YoY) in operating income in fiscal 2019. Three quarters in, Yotai posted 20,597 million yen ($184 million USD, +15.7% YoY) in revenues and 3,852 million yen ($34.4 million USD, +56.5% YoY) in operating income. Historically, there hasn’t been a noticeable seasonality to Yotai’s business.

Shareholders

As of Q3 2019 (ending December 31st, 2018), Yotai Refractories had 25,587,421 shares issued and 3,609,626 shares in treasury, putting outstanding shares at 21,977,795.

Here are the major shareholders:

Source: Company filings and Nikkei


Sumitomo Osaka Cement remains Yotai Refractories’ largest shareholder today. There are no other notable facts in the company’s shareholder composition.

The company offers no equity compensation to management.

Financials & Valuation

  • Yotai Refractories is an established refractory product maker with a particular strength in refractory bricks, holding the highest market share in Japan.
  • The company maintains a remarkably stable business, generating consistent profits throughout the 2008-2010 global financial crisis.
  • More recently, Yotai Refractories is delivering strong operating margins over the last several years, along with its peers.
  • At 520 yen per share, the company trades at 60% of adjusted NCAV with a market cap of 11,429 million yen ($102 million USD).
  • Investors can expect an investment CAGR of between 8% and 16.2%, inclusive of dividends, over the next 5 to 8 years.

Yotai Refractories is a well established refractory product maker with a rich history. It is particularly focused on refractory bricks, with its products used on historical landmarks like the Tokyo Train Station. Moreover, the company is the market share leader in Japan for refractory bricks.

With its close association to Sumitomo Osaka Cement, Yotai maintains a remarkably stable business, remaining comfortably profitable through the 2008-2010 global financial crisis. Its recent performance has come in particularly strong, with a 5-year revenue CAGR of 3.8% and operating margins improving from 4.4% to 14.7% in five years.

That said, many of its peers also experienced similar levels of revenue growth and operating performance improvements over the same timeframe. Interestingly, however, Yotai Refractories’ stock remains the lowest-priced among its peers:

Source: GuruFocus & Nikkei, compiled by Kenkyo Investing


Half of Yotai’s key land holdings have remained in the company since the late 1930s, when the company was first founded. The other half came through the Osaka Ceramics merger in 1993. Its Osaka land holdings are difficult to appraise, with its Kaizuka Factory and headquarters located at the same address and its headquarters appearing to show floor space of the building rather than land area in its filings. With that said, the factory land appears undervalued by about 250 million yen ($2.2 million USD).

The land where the Hinase factory and Yoshinaga factory sit on has been with the company since its founding. Both are located in rural Okayama prefecture. Although the book value of the land is easily worth one-tenth of current market prices, it’s best to not assign a value as it will likely be incredibly difficult for Yotai to actually sell the properties in a reasonable amount of time.

As far as finances go, Yotai maintains a debt-free balance sheet with a strong 0.74 equity-to-asset ratio. At 520 yen per share, the company trades at 67.3% NCAV with a market cap of 11,429 million yen ($102 million USD). Adjusted for investment security holdings, the company trades at 60% NCAV.

Yotai’s operating business is more than healthy and resistant to downturns, supported by a strong balance sheet. The company ought to trade at or above adjusted NCAV. From a behavioral perspective, however, there is little reason beyond Yotai’s strong guidance that investors can get excited about. With this in mind, investors can expect an investment CAGR of between 8% and 16.2%, inclusive of dividends, over the next 5 to 8 years.

Source: Kenkyo Investing estimates


The bottom line

Yotai Refractories is a specialty manufacturer of refractory products, with a particular strength in refractory bricks. The operating business is healthy, profitably weathering through the 2008-2010 global financial crisis. Additionally, its balance sheet is debt-free with a strong 0.74 equity-to-asset ratio. Investors can expect an investment CAGR of between 8 and 16.2%, inclusive 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.