Thinking Points

  • Maruka (TSE: 7594) is a global trading company specializing in industrial machinery and construction machinery with a key end-market in the automotive industry.
  • With plans to offer engineering and system integration services to complement its existing machinery business, the company has increased its foreign presence over the last decade.
  • In 2008, foreign revenues accounted for 23.5% of total revenues. In comparison, 41% of revenues were generated outside of Japan in 2018.
  • At 1,879 yen per share, Maruka trades at an adjusted 1.7x EV/EBIT with a market capitalization of 15,810 million yen ($146 million USD).
  • Investors can expect an investment CAGR of between 7.3% and 15.6%, inclusive of dividends, over the next three years.

Introduction

Maruka (TSE: 7594) is a trading company specializing in industrial machinery and construction machinery. Accordingly, the company reports through two segments: Industrial Machinery and Construction Machinery.

Source: Company filings

Historically, the company’s focus has been on the Japanese and North American markets, however, Maruka has meaningfully expanded its business in Asia over the last decade. Its largest end-market is the automotive industry, which accounted for 55% of total sales in fiscal 2018.

The business & environment

Maruka was founded in 1946 in Osaka to import and export paper, wool, bicycles, bearings, and tools. Its first foray into machinery didn’t come about until 1955, when the company set up its machinery division. Maruka started by handling machine tools and forge presses, then proceeded on with construction machinery.

With machinery increasingly accounting for a larger portion of business, the company changed its name to Maruka Machinery in 1962, establishing itself as a machinery-specialized trading company. Meanwhile, the company got an early start in expanding its business internationally, opening its first overseas office in Bangkok, Thailand in 1959. Maruka then continued its global expansion, opening offices in Jakarta (1962), Manila (1965), and New York (1966).

Today, Maruka operates out of 12 offices domestically and 23 offices internationally. Its key markets include Japan, North America, China, and Southeast Asia. The Industrial Machinery segment accounts for the bulk of revenues with the Construction Machinery segment only operating domestically.

Source: Company filings

In fiscal 2018, foreign revenues accounted for 41% of total revenues, according to short form filings. In fact, foreign revenues have been on an overall growth trend. Prior to the 2008-2010 global financial crisis, foreign revenues accounted for 23.5% of total revenues (2008).

Source: Company filings

The global financial crisis had a materially negative impact on Maruka’s business. This is largely because Maruka’s biggest end-market is the automotive industry. In 2018, the automotive industry contributed to 55% of annual revenues compared to 45.6% in 2008, prior to the financial crisis.

Aside from the automotive industry, Maruka has no single end-market that contributes to revenues meaningfully. Rather, it sells machines to a variety of industries, including precision medical equipment makers, electronics makers, and farming machinery makers.

Maruka has a couple of key supplier contracts with Kobelco Construction Machinery (subsidiary of Kobe Steel [TSE: 5406]) and Toyo Machinery & Metal (TSE: 6210).

Its contract with Kobelco Construction Machinery was originally signed in 1999, making Maruka a designated distributor of construction machinery and associated parts. The contract with Toyo Machinery & Metal was signed 2001, making Maruka the sole distributor of plastic injection molding machines in the United States.

As a side note, Maruka only operates its construction machinery business domestically, although the summary description of its contract with Kobelco Construction Machinery in the filings does not specify whether the contract is limited to domestic sales.

Maruka maintains an asset-light business as it is a trading company. While revenues fell by 53.1% between 2008 and 2010, the company managed to remain slightly profitable with operating margins at 0.8% in 2009. Normalized levels are around 4%.

For fiscal 2019 (ending November 30, 2019), Maruka is guiding for 67,000 million yen ($620 million USD, +3.9% YoY) in revenues and 2,700 million yen ($25 million USD, +3.4% YoY) in operating income. Thus far, Q1 2019 revenues have come in 1.3% higher compared to last year, but with operating income 1.8% lower.

In early 2017, Maruka announced its medium term plan with a revenue target of 65,000 million yen ($601 million yen) and an operating income target of 3,000 million yen (27.8 million USD). With 2018 performance coming in strong, the company adjusted its revenue target to 70,000 million yen ($648 million USD) while keeping operating income targets unchanged.

Maruka’s medium term plan consisted of focusing on the creation of value-added business lines, like offering engineering services and system integration services as a part of turn-key package for machine sales. It’s also focused on further expansion of foreign markets – particularly the Mexican, US, and Asian markets – as well as expansion into other industries, like food processing machines and robotics.

Shareholders

As of Q1 2019 (ending February 28, 2019), Maruka had 9,327,000 shares issued and 876,656 shares in treasury, putting outstanding shares at 8,450,344.

Here are the major shareholders:

Source: Company filings & Nikkei

The company does not have any unexercised options outstanding and does not offer equity compensation to the management team.

As a side note, Fujikoshi (TSE: 6474) is an industrial robot and machine tool manufacturer.

According to recent EDINET filings, Singapore-based Symphony Financial Partners holds 1,125,500 shares, or 13.3% of outstanding shares, as of May 15th, 2019 (Japanese). The fund has been increasing its stake, with filings two years ago showing a 645,500 share position (Japanese).

Over the last 4 years, the company has conducted share repurchases.

Financials & Valuation

  • Maruka is a global trading company specializing in industrial machinery and construction machinery with key end-market in the automotive industry.
  • With plans to offer engineering and system integration services to complement its existing machinery business, the company has increased its foreign presence over the last decade.
  • In 2008, foreign revenues accounted for 23.5% of total revenues. In comparison, 41% of revenues were generated outside of Japan in 2018.
  • At 1,879 yen per share, Maruka trades at an adjusted 1.7x EV/EBIT with a market capitalization of 15,810 million yen ($146 million USD).
  • Investors can expect an investment CAGR of between 7.3% and 15.6%, inclusive of dividends, over the next three years.

Maruka is a global trading company specializing in industrial machinery and construction machinery. Its biggest end-market is the automotive industry, which accounted for 55% of 2018 revenues. While the company’s focus has been on the import and export of machines so far, it has plans to offer engineering and system integration services to complement its existing business.

Over the last decade, the company expanded its foreign operations meaningfully. While foreign revenues accounted for 23.5% of total revenues in 2008, this figure increased to 41% by the end of fiscal 2018. Additionally, with the help of a healthy economy, Maruka posted record high revenues and operating income in 2018.

The key risk for Maruka is a slowdown in the automotive industry. With that said, the company managed to profitably weather through the 2008-2010 global financial crisis. Additionally, due to the nature of the trading business, much of its assets and liabilities are current items, and the company maintains an asset-light operation. As of Q1 2019, Maruka’s equity to asset ratio stands at a respectable 0.44.

At 1,879 yen per share, Maruka trades at 2.1x EV/EBIT with a market capitalization of 15,810 million yen ($146 million USD). Adjusted for long-term investment security holdings, the company trades at 1.7x EV/EBIT.

Keeping in mind that Maruka has cyclical exposure, it’s best to evaluate the business on a long-term normalized basis. As a reference, we will also consider valuation based on Maruka’s medium term guidance.

Assuming a fair value EV/EBIT of 3x, normalized operating margins of 3.9% and normalized revenues of 44,000 million yen ($407 million USD), investors can expect an investment CAGR of 7.3%, inclusive of dividends, over a three year period.

Taking Maruka’s medium term guidance into account, investors can expect an investment CAGR of 15.6%, inclusive of dividends, over a three year period.

The bottom line

Maruka is a global trading company specializing in industrial machinery and construction machinery. Over the last decade, it has focused on foreign expansion, raising its percentage of foreign revenues from 23.5% in 2008 to 41% in 2018. Going forward, the company plans to offer services complementary to its current business, like engineering and system integration services, while continuing its foreign expansion. At 1,879 yen per share, investors can expect an investment CAGR of between 7.3% and 15.6%, inclusive of dividends, over the next three 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.