Thinking Points

  • Trinity Industrial (TSE: 6382) is an established maker of paint-related industrial equipment and auto parts with close ties to the Toyota Group.
  • With 42.6% of 2018 revenues coming from the Toyota Group, the company is highly exposed to a cyclical automotive industry, which is evidenced by a decline in revenues and a year of operating losses during the 2008-2010 financial crisis.
  • Over the long term, however, the company is healthy, generating profits for the most part while holding a respectable financial position with an equity-to-asset ratio of 0.60.
  • At 586 yen per share, Trinity Industrial trades at 71.0% of adjusted NCAV with a market cap of 9,611 million yen ($85.8 million USD).
  • Investors can expect an investment CAGR of between 7.6% and 15.3%, inclusive of dividends, over a 5 to 8 year period.

Introduction

Trinity Industrial (TSE: 6382) mainly manufactures and sells industrial coating equipment and systems. Additionally, the company makes and sells automotive interior and exterior parts, like steering wheels, mud guards, and engine covers. Trinity Industrial operates through two segments: Equipment and Auto parts.

Source: Company filings


The company is closely affiliated with largest shareholder Toyota Motor (TSE: 7203) and its subsidiaries. Collectively, the Toyota Group accounted for 42.6% of total revenues in 2018. Meanwhile, the company aims to expand its Equipment business beyond the automotive industry as a part of its medium term plan (2017-2021).

The business & environment

Trinity Industrial got its start in 1946 out of Tokyo as Nihon Kogei Kogyo, or Japan Crafting Industry. The company has largely remained shy of the public spotlight, with practically no management interviews or company coverage available anywhere on the internet.

According to its summarized company history (available for every company through annual filings), the company opened its Nagoya office in 1959, where Toyota Motor is headquartered. In 1977, Toyota Motor became an equity partner in Trinity Industrial. Three years later in 1980, the company moved its headquarters from Tokyo to Nagoya. In 1983, Trinity Industrial then moved its headquarters to Toyota City in 1983 and started manufacturing auto parts. The headquarters remains in Toyota City today, down the street from Toyota Motor headquarters.

Over the course of its existence, the company grew closer to the Toyota Group, providing coating equipment and systems as well as auto parts. For its auto parts, Trinity Industrial is particularly well known for making wood patterns look natural. This technology is applied to steering wheels, door panels, shift knobs, dashboards, and more.

Source: Trinity Industrial website


Meanwhile, with its Equipment business, Trinity Industrial is known for its coating technology. The company designs, engineers, constructs, and maintains coating plants, systems, and industrial machinery.

Source: R&D Lab, Trinity Industrial website


With its close relationship to the Toyota Group, Trinity Industrial’s business performance is highly dependent on a cyclical automotive industry, and the Equipment business requires a healthy capex environment.

Source: Company filings


Interestingly, Trinity Industrial’s revenues never fully recovered from the 2008-2010 global financial crisis. With that said, operating margins has recovered to pre-crisis levels:

Source: Company filings


Although the company’s performance steadily improved in the years following the global financial crisis, 2019 was a relatively mild year for Trinity Industrial.

For fiscal 2020, the company is guiding for 35,500 million yen ($318 million USD, +0.4% YoY) in revenues and 2,000 million yen ($17.9 million USD, +4.8% YoY).

Shareholders

As of Q4 2019 (ending March 31st, 2019), Trinity Industrial had 18,220,000 shares issued and 1,819,256 shares in treasury, putting outstanding shares at 16,400,744.

Here are the major shareholders as of September 2018 as long form annual filings for fiscal 2019 are not released yet:

Source: Company filings & Nikkei


In addition to Toyota Motor, Toyota Tsusho (TSE: 8015), and Toyota Industries (TSE: 6201), Denso (TSE: 6902) is a part of the Toyota Group. Collectively, the group owns 41.9% of outstanding shares.

There are no management equity compensation plans and no unexercised stock options.

After decades of negligible share repurchases, the company repurchased 1,800,000 shares (9.9% of outstanding shares as of Q2 2018) for 1,602 million yen ($14.4 million USD) during fiscal 2018. The explanation for the repurchase was to improve capital efficiency. Since the repurchase in November 2017, however, the company has not made any additional repurchases.

Financials & Valuation

  • Trinity Industrial is an established maker of paint-related industrial equipment and auto parts with close ties to the Toyota Group.
  • With 42.6% of 2018 revenues coming from the Toyota Group, the company is highly exposed to a cyclical automotive industry, which is evidenced by a decline in revenues and a year of operating losses during the 2008-2010 financial crisis.
  • Over the long term, however, the company is healthy, generating profits for the most part while holding a respectable financial position with an equity-to-asset ratio of 0.60.
  • At 586 yen per share, Trinity Industrial trades at 71.0% of adjusted NCAV with a market cap of 9,611 million yen ($85.8 million USD).
  • Investors can expect an investment CAGR of between 7.6% and 15.3%, inclusive of dividends, over a 5 to 8 year period.

Founded shortly after World War II in 1946, Trinity Industrial started off as a small time crafting company. After its entrance into the Nagoya market in 1959, however, the company established a working relationship with Toyota. By 1977, Toyota became an equity partner and in 1980, Trinity Industrial moved its headquarters to Nagoya, deepening its ties with the Toyota Group.

Today, Trinity Industrial makes and sells industrial coating equipment and systems as well as automotive parts. In 2018, the Toyota Group accounted for 42.6% of total revenues. With a high level of customer concentration, Trinity Industrial is exposed to the the cyclicality of the automotive industry, which is evidenced by declining revenues and  a period of operating losses during the 2008-2010 global financial crisis.

Over the long term, however, the company is healthy, generating profits aside from down cycles in the automotive industry. Additionally, the company maintains a debt-free balance sheet with a respectable 0.60 equity-to-asset ratio.

As far as land holdings go, the main properties owned by Trinity Industrial are its two plants and headquarters in Aichi prefecture. Our estimates show the book value of the two plants to be in line with market prices while the headquarters appears undervalued by 1,300 million yen ($11.7 million USD).

At 586 yen per share, Trinity Industrial trades at an unadjusted 86.3% NCAV with a market capitalization of 9,611 million yen ($85.8 million USD). Adjusted for investment securities of 2,389 million yen ($21.4 million USD), the company trades at 71.0% NCAV.

With its Toyota affiliation, it’s fair to say that Trinity Industrial is a healthy company with a stable future outlook. That said, the company is currently operating in a strong environment within a historically cyclical automotive industry. Hence, a fair value of 100% adjusted NCAV over the next 5 to 8 years is appropriate.

In evaluating Trinity Industrial’s fair value, we used 2020 guidance and normalized business performance leading up to ~2027 (operating income of ~950 million yen, or $8.5 million USD). For dividend payouts, we used 30 yen per share for 2020 and 15 yen per share thereafter. Investment CAGR figures below are inclusive of dividends.

Source: Kenkyo Investing estimates


Investors can expect an investment CAGR of between 7.6% and 15.3%, inclusive of dividends, over the next 5 to 8 years. As an aside, forward dividend yield is at 5.1% based on 586 yen per share price.

The bottom line

Trinity Industrial is an established maker of industrial paint equipment and systems as well as automotive parts. The company, although susceptible to the automotive business cycle, is closely affiliated with the Toyota Group, which is also its largest shareholder. Taking the Toyota affiliation into consideration, the company is expected to have a stable future. AT 586 yen per share, investors can expect an investment CAGR of between 7.6% and 15.3%, 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.