Thinking Points

  • Takamatsu Construction Group (TSE: 1762) is a reputable mid-tier general contractor and construction group known for condo development and earthquake-resistant construction.
  • Over the last decade, the group managed to grow revenues at a 4% CAGR in an increasingly competitive construction industry through M&A efforts.
  • As the domestic market is expected to decline over the long term, the group aims to solidify its domestic business while continuing its M&A efforts and building new foreign businesses.
  • At 2,319 yen per share, Takamatsu Construction Group trades at an adjusted 92.8% NCAV with a market capitalization of 80,745 million yen ($737 million USD).
  • Investors can expect an investment CAGR of between 7.9% and 21.6%, inclusive of dividends, over a 5 to 8 year period.

Introduction

Takamatsu Construction Group (TSE: 1762) is a mid-tier general contractor with a particular strength in condo development and construction. The company operates through three segments: Construction, Civil Engineering, and Real Estate.

Source: Company filings

Takamatsu Construction Group is involved in a variety of areas, including Buddhist temple construction and home renovations, through its 22 group companies. More recently, the company is looking to expand its business into the US market, starting by renovating and renting properties in the New York, Los Angeles, and Dallas markets.

The business & environment

Takamatsu Construction Group (TCG)’s roots can be traced back to 1917, when the Takamatsu Gumi was formed in Osaka. The company is well known as a condo developer, and was among the first to take a “Consulting & Construction” approach.

Essentially, how consulting & construction works is that the company proactively reaches out to land owners and proposes to build rental property. This approach fueled TCG’s growth in the late 1960s during Japan’s economic miracle, becoming common practice in the industry.

After Japan’s economic bubble collapsed in the late 1980s, however, the C&C approach quickly faded. Interestingly, the approach is gaining traction again recently, with companies like First Corporation (TSE: 1430) specializing in the approach.

According to M&A Online (Japanese), there were three turning points for the company, one of which is TCG’s adoption of the C&C approach. The second turning point happened in 1995, when the Great Hanshin Earthquake rattled the Kansai region, TCG’s home turf. At the time of the earthquake, TCG had 108 projects underway in the region. Upon inspection, not one building frame was damaged, which boosted TCG’s reputation as an earthquake resistant builder.

The third turning point for the company was its M&A strategy from 2000 and on. M&A efforts were kicked off with the acquisition of Komatsu Construction from heavy equipment maker Komatsu (TSE: 6301). Later in 2002, the company acquired general contractor Aoki Construction and merged it with Komatsu Construction in 2004, forming Asunaro Aoki Construction (TSE: 1865).

To be sure, TCG’s acquisitions aren’t always profit-driven. In 2006, the company acquired Osaka-based Kongo Gumi, the world’s oldest company, which was on the verge of bankruptcy. Despite board opposition, then-chairman Takayuki Takamatsu proceeded to acquire the 1,428 year old company, emphasizing that “Allowing Kongo Gumi to go bankrupt would be a shame for Osaka”. Interestingly, TCG owns two of the world’s oldest construction companies: Kongo Gumi (founded in 578) and Nakamura Shaji (founded in 970).

As of fiscal 2019 year end, the company has 22 group companies, with Takamatsu Construction and Asunaro Aoki Construction at the core. The company reports through three segments: Construction, Civil Engineering, and Real Estate.

Source: Company filings

The Civil Engineering segment was included as a part of the Construction segment until 2011. In fiscal 2019, condo related work accounted for 37.2% of orders received. The company expects strong construction investment to continue into fiscal 2022, and then gradually decline thereafter.

As a reference, here is how construction investment has fared over the last 30 years:

Despite a construction industry smaller and more competitive than previous decades, TCG has managed to grow revenues over the last decade, primarily through M&A:

Source: Company filings

For fiscal 2019, TCG guided for 268,000 million yen ($2,446 million USD, +9.3% YoY) in revenues and 15,000 million yen ($136.9 million USD, +10.1% YoY) in operating income. The company recorded 249,720 million yen ($2,279 million USD, +1.9% YoY) in revenues and 12,441 million yen ($113.5 million USD, -8.7% YoY) in operating income for fiscal 2019, performing below guidance.

For fiscal 2020, TGC is expecting revenues of 270,000 million yen ($2,464 million USD, +8.1% YoY) and operating income of 13,300 million yen ($121.4 million USD, +6.9% YoY). Over the medium term (~fiscal 2020), TCG is targeting 300,000 million yen ($2,738 million USD) in revenues and 18,000 million yen ($164.3 million USD) in operating income. The company plans to achieve this through strengthening non-condo projects, continued M&A efforts, and foreign expansion (particularly US).

Shareholders

As of Q4 2019 (ending March 31st, 2019), Takamatsu Construction Group had 38,880,000 shares issued and 4,061,303 shares in treasury, putting outstanding shares at 34,818,697.

Here are the major shareholders:

Source: Company filings & Nikkei

Sankosha and Taka are both Takamatsu family funds. Collectively, the Takamatsu family controls 48.3% of outstanding shares.

There are no unexercised stock options.

Leading up to fiscal 2014, TCG regularly repurchased shares. However, from fiscal 2014 and on, the company stopped share repurchases until fiscal 2018 (July/August 2017), when it made a below market tender offer on its shares. Sankosha, Takayuki’s younger brother’s fund, offloaded 600,000 shares for 2,513 yen per share. Later on in fiscal 2018 (January/February 2018), TCG made a similar below market tender offer where Sankosha offloaded an additional 600,000 shares for 2,797 yen per share.

Some data sources misrepresent the amount spent on repurchases in fiscal 2018, which came out to a total of 3,186 million yen ($29.1 million USD). The company repurchased 3.1% of issued shares in the process.

Financials & Valuation

  • Takamatsu Construction Group is a reputable mid-tier general contractor and construction group known for condo development and earthquake-resistant construction.
  • Over the last decade, the group managed to grow revenues at a 4% CAGR in an increasingly competitive construction industry through M&A efforts.
  • As the domestic market is expected to decline over the long term, the group aims to solidify its domestic business while continuing its M&A efforts and building new foreign businesses.
  • At 2,319 yen per share, Takamatsu Construction Group trades at an adjusted 92.8% NCAV with a market capitalization of 80,745 million yen ($737 million USD).
  • Investors can expect an investment CAGR of between 7.9% and 21.6%, inclusive of dividends, over a 5 to 8 year period.

Takamatsu Construction Group is an established mid-tier general contractor and construction group with a 102 year history. The company’s growth was originally fueled through its adoption of the consulting & construction approach to condo development in the late 1960s.

When a major earthquake struck the Kansai region in the 1990s, the company gained a reputation as a highly talented earthquake-resistant builder as none of its projects incurred material damage on the building frame.

More recently, the company has built a reputation as a company aggressive with its M&A strategy. With that said, TCG remains debt-free with an equity to asset ratio of 62%.

The company delivered strong business performance over the last decade despite the challenging construction environment, however, the industry is expected to increasingly become more competitive as construction investment is expected to decline over the long term.

To counter this, TCG plans to strengthen its domestic business through further M&A efforts and further expansion outside of condo development. While the company is likely to at least maintain its current business scale, investor sentiment may not improve with a bleak industry outlook.

What is likely to drive investor sentiment is whether or not CDG manages to successfully buildout foreign operations. The company is currently looking to renovate and rent properties in the United States, namely in the New York, Los Angeles, and Dallas markets.

At 2,319 yen per share, CDG trades at 98.8% of NCAV with a market capitalization of 80,745 million yen ($737 million USD). Adjusted for investment security holdings, however, the company trades for 92.8% of NCAV.

Although CDG owns land, it does not disclose book value of land by location, making it difficult to evaluate market prices. The company did, however, take advantage of land revaluation, which was allowed between 1998 and 2003 to recapitalize corporate balance sheets. Hence, despite CDG’s 100+ year history and land purchases from early on, the company’s land assets are likely only modestly discounted compared to recent market prices.

While it’s common for Japanese construction companies to trade below NCAV, many of the larger construction companies trade well above NCAV. For example, Nishimatsu Construction (TSE: 1820), Haseko Corporation (TSE: 1808), and Sumitomo Mitsui Construction (TSE: 1821) all trade above 2x NCAV.

CDG’s business is smaller than the three companies mentioned above. With that said, the company is well operated with a strong balance sheet, making it worth at least 120% NCAV. Furthermore, if CDG is able to successfully expand operations outside of Japan, investor sentiment is highly likely to shift positively, assigning a valuation in excess of 200% NCAV.

With that in mind, investors can expect an investment CAGR of between 7.9% and 21.6%, inclusive of dividends, over a 5 to 8 year period.

Source: Kenkyo Investing estimates

The bottom line

Takamatsu Construction Group is a reputable mid-tier general contractor and construction company known for condo development and earthquake-resistant construction. Despite its M&A strategy, the company maintains a debt-free balance sheet with a healthy 0.62 equity to asset ratio. Going forward, TCG plans to solidify its domestic business while continuing M&A efforts and building new foreign businesses. Overall, investors can expect an investment CAGR of between 7.9% and 21.6%, 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.