Thinking Points

  • Hibiya Engineering (TSE: 1982) is an established engineering and construction company primarily serving Japan’s largest telecom company, the NTT Group (TSE: 9432), which accounted for 51.5% of revenues in 2018.
  • Historically, the NTT Group concentration helped Hibiya Engineering profitably get through difficult times, but the company has been unable to meaningfully grow its non-NTT revenues over the last decade. Still, the operating business remains healthy.
  • More recently, after years of consistent share repurchases and dividend payouts, the company doubled down on repurchases, along with record-level dividend payouts.
  • At 1,870 yen per share, Hibiya Engineering trades at an adjusted 89.6% NCAV with a market cap of 44,985 million yen ($402 million USD).
  • Investors can expect an investment CAGR of between 8.4% and 14.9%, inclusive of dividends, over the course of 5 to 8 years.

Introduction

Hibiya Engineering (TSE: 1982) is an all around engineering and construction company with a particular focus on air conditioning, followed by plumbing and electricals. The company maintains a close relationship with the NTT Group (TSE: 9432), which accounted for 51.5% of revenues in 2018. It operates through three segments: Installation work, equipment sales, and equipment manufacturing. For the purpose of analyzing Hibiya Engineering, however, it’s more appropriate to show revenues by type of work:

Source: Company filings


More recently, Hibiya Engineering is focusing on high value air conditioning projects for facilities like data centers. During the course of its current medium term plan (ending March 2020), the company aims for productivity improvements through IT implementation and recurring business expansion through a facility and equipment lifecycle solution focus.

The business & environment

Hibiya Engineering got its start in 1966, taking on air conditioning, plumbing, and electrical works from day 1. Unlike most companies, Hibiya Engineering was founded with a customer already lined up: the NTT Group. In fact, the company got “Hibiya” in its name because the NTT Group’s headquarters, located next to Hibiya Park in Tokyo, was often referred to as “Hibiya headquarters”.

In addition to its Tokyo office, Hibiya Engineering had offices setup in Osaka, Nagoya, Sendai, Hiroshima, Fukuoka, and Kumamoto within four months of its founding. The company was essentially built to take on NTT-related work back when NTT was still a state-owned company (before 1986).

Some online sources (Japanese) point out that Hibiya Engineering, along with several other NTT-Group and affiliated companies, are revolving doors for NTT-retirees. To the extent that Hibiya Engineering actually generates almost half of its revenues outside of the NTT-Group, however, the company is likely still competitive and functional.

With that said, 7 out of 13 board members have experience working for an NTT Group company. Over the course of the last decade, Hibiya Engineering has had continued strong exposure to the NTT Group:

Source: Company filings


Besides getting most of its work from the NTT Group, Hibiya Engineering is a typical construction and engineering firm. Although it’s clear that the NTT-affiliation helped the company profitably carry through difficult times like the 2008-2010 global financial crisis, Hibiya Engineering has been unable to meaningfully grow its non-NTT revenues over the last decade.

The bulk of Hibiya Engineering’s work has historically been and continues to be air conditioning. The company mainly handles office building and data center projects followed by logistics facilities, education/medical facilities, and hotels.

Source: Company filings


In its medium term plan (ending 2020), the company mentioned two key strategies: productivity improvements through investment in technology and people, and the expansion/deepening of its lifecycle solution offering.

For productivity improvements, one of the key initiatives is the implementation of cloud services for viewing and commenting of construction documents. Essentially, instead of carrying around large paper drawings on the job site, employees will be able to view updated drawings on site through a tablet. Although this may sound as though Hibiya Engineering is behind the technological curve, the construction industry is one of the least automated and most inefficient industries.

As for the lifecycle solution offering, Hibiya Engineering is in an interesting position to offer total maintenance services, with a long history in air conditioning, plumbing, and electrical work. The company is pursuing this opportunity and has already taken on several buildings for a total maintenance services.

Judging by recent business performance, the medium term financial targets appear elusive, with the company guiding for 75,000 million yen ($670 million USD) in revenues and 4,000 million yen ($35.7 million USD) in operating income.

Source: Company filings


For 2019, the company originally guided for 75,000 million yen in revenues ($670 million USD) and 4,000 million yen ($35.7 million USD) in operating income. Prior to Q3 2019 earnings, however, this was adjusted down to 73,000 million yen ($652 million USD) in revenues and 3,200 million yen ($28.6 million USD) in operating income as some of the projects on hand were not progressing as quickly as the company projected.

Shareholders

As of Q3 2019 (ending December 31st, 2018), Hibiya Engineering had 26,506,321 shares issued and 2,205,246 shares in treasury, putting outstanding shares at 24,301,075.

Here are the major shareholders:

Source: Company filings & Nikkei


Hibiya Engineering Business Association consists of customers and suppliers to Hibiya Engineering.

As of March 31st, 2018, there were 133,100 unexercised stock options. This is equivalent to less than 1% of outstanding shares.

What’s particularly interesting about Hibiya Engineering is that it has a history of consistently repurchasing shares and paying out dividends. From fiscal 2018 on, the company has doubled down on its share repurchases, spending 11,094 million yen ($99 million USD) purchasing 4,529,988 shares (~15.7% of outstanding shares in Q2 2018). This amounts to more than the last 5 years of dividends and share repurchases combined.

The effort continued into 2019 at a much lower but historically consistent level, with the company spending 702 million yen ($6.3 million USD) repurchasing 378,900 shares (~1.6% of outstanding shares in Q3 2019). Since the Japan Exchange Group requires 2,000 shareholders for continued Tokyo Section 1 listing and Hibiya Engineering’s shareholder count was at 2,713 in March 2018, there is a high probability that the company will either scale back its repurchases and increase dividends, or selectively conduct off-market transactions with large shareholders going forward.

Financials & Valuation

  • Hibiya Engineering is an established engineering and construction company primarily serving the NTT Group, which accounted for 51.5% of revenues in 2018.
  • Historically, the NTT Group concentration helped Hibiya Engineering profitably get through difficult times, but the company has been unable to meaningfully grow its non-NTT revenues over the last decade.
  • More recently, after years of consistent share repurchases and dividend payouts, the company doubled down on repurchases, along with record-level dividend payouts.
  • At 1,870 yen per share, Hibiya Engineering trades at an adjusted 89.6% NCAV with a market cap of 44,985 million yen ($402 million USD).
  • Investors can expect an investment CAGR of between 8.4% and 14.9%, inclusive of dividends, over the course of 5 to 8 years.

Hibiya Engineering is an established engineering and construction company built to support Japan’s largest telecom company, the NTT Group. Although some sources point out downsides to the NTT-affiliation, Hibiya Engineering has historically benefited from the high customer concentration. This was especially true during the 2008-2010 global financial crisis, when private sector revenues declined while NTT-revenues remained strong, helping the company profitably weather through the down cycle.

Unlike many of the companies appearing on deep value screens in Japan, Hibiya Engineering does not own a significant amount of land. It does, however, own significant investment securities amounting to 25,349 million yen ($226 million USD), or 56.3% of its current market cap. Most screening tools categorize investment securities as other long term assets, excluding it as a current asset. This puts the company’s price-to-NCAV at 179% with shares trading at 1,870 yen (April 2019), far down the deep value screen list.

When adjusting for investment securities, P/NCAV comes in at 89.6%. Still not the lowest prices seen in Japan as of this writing (April 2019), but there’s more. What’s most interesting about the company is its historically consistent share repurchases, along with dividend payouts.

As covered earlier in the Shareholders section, Hibiya Engineering had record-level share repurchases in 2018 along with historically consistent repurchases in 2019. With the Japan Exchange Group requiring Tokyo Section 1 listed companies to maintain a shareholder count of above 2,000 (Hibiya had 2,713 in March 2018), we believe the company will scale back its repurchasing program. That said, the company will continue its shareholder return efforts at elevated levels, which is highly likely to come in the form of increased dividends going forward.

Although in most optimistic deep value cases, we consider 120% of adjusted NCAV to be an appropriate fair valuation, Hibiya Engineering maintains a healthy operating business and is actively returning value to shareholders at an elevated level. Hence, 140% to 160% of adjusted NCAV over 5 to 8 years is an appropriate valuation for the company.

Source: Kenkyo Investing Estimates


At 1,870 yen per share, investors can expect an investment CAGR of between 8.4% and 14.9%, inclusive of dividends, over a 5 to 8 years period. At the company’s current dividend payout of 80 yen per share, the dividend yield is 4.3%, making for a safe investment.

The bottom line

Hibiya Engineering is an established engineering and construction firm with close ties to Japan’s largest telecom company, the NTT Group. Although the company hasn’t grown revenues meaningfully outside of the NTT Group, business performance has remained stable even through down cycles. More recently, the company has doubled down its shareholder return efforts, resulting in record level share repurchases and dividend payouts. At 1,870 yen per share, investors can expect an investment CAGR of between 8.4% and 14.9%, inclusive of dividends, over a 5 to 8 year period.


Kenkyo Investing
Kenkyo Investing

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