Thinking Points

  • Asanuma Corporation (TSE: 1852) is an established mid-tier construction contractor with a project portfolio covering everything from office buildings and medical facilities to water works and tunnels.
  • After the 2011 Tohoku Earthquake, the company recorded operating losses as labor costs rose sharply with reconstruction demand.
  • Since then, however, the company has recorded supernormal profits, and expects continued strong performance going forward.
  • At 3,640 yen per share, Asanuma Corporation trades at an adjusted EV/EBIT of 0.7x with a market capitalization of 27,781 million yen ($264 million USD).
  • Investors can expect an investment CAGR of between 6.0% and 18.3%, inclusive of dividends, over the next three years.

Introduction

Asanuma Corporation (TSE: 1852) is a mid-tier general construction contractor with a 127 year history. The company takes on a variety of projects ranging from office buildings and medical facilities to water works and tunnels. Asanuma operates through two segments: Construction and Civil Engineering.

Source: Company filings

Following the 2011 Tohoku Earthquake, Asanuma Corporation booked operating losses as labor costs rose sharply. However, the company recorded supernormal profits since then, and expects continued strong performance. More recently, the company has been friendly to activist shareholders, disclosing information requested by Strategic Capital.

The business & environment

Asanuma Corporation’s roots can be traced back to 1724, when Jinsaemon Asanuma started working in construction for the Yanagisawa feudal domain in the Edo era. Not long after Japan’s feudal era ended and imperial rule was back in place (1868), Asanuma-Gumi was officially formed in Nara prefecture (near Osaka).

The company started out by focusing on temple and school construction. Its focus on school construction was particularly strong. According to Asanuma’s recruiting site, the company was referred to as “Asanuma, the schoolmaker” (Gakkou-no-Asanuma) at one point. 

Source: Yanagisawa Shrine, Company History Book 

As the company continued building temples, schools, and homes, it started to venture out into other areas in the early 1900s. Asanuma took on factory and hospital construction projects as well as government projects during this time. 

When the great depression came along, the Asanuma family considered closing shop while it was still able to remain solvent and pay its employees’ retirement benefits. According to the company’s history book, employees requested a reduction in pay, and for the company to continue operating. 

Not long after the great depression, in 1937, the company moved out of its original headquarters in Nara and into Osaka, where the company remains today. At the same time, it expanded into Tokyo and Nagoya. With World War II around the corner, the company started working on military related projects as well.

After World War II, Asanuma also started working on construction projects for the Allied Forces, encountering American construction technologies for the first time. During Japan’s post-war reconstruction and economic miracle, the company opened offices all across Japan, establishing a nationwide sales office network.

At this point, the company had already taken on a variety of construction projects, both from governments and the private sector, making Asanuma a reputable general contractor. Over the last 40 years, the company took on even bigger projects, working on hotels, universities, urban redevelopment projects, and more.

Today, the company operates under two segments: Construction and Civil Engineering. 

Source: Company filings

Although revenues have declined compared to pre-global financial crisis levels, this is also true for the industry as a whole. In the past several years, however, the construction industry has grown after a two decade decline. Interestingly, the company’s operating income has grown along with this trend.

Source: Company filings

Asanuma attributes the operating losses incurred in fiscal 2012 and 2013 to a sharp rise in labor costs following the 2011 Tohoku Earthquake, mainly due to reconstruction efforts. As a result, profitability for orders signed prior to the earthquake deteriorated significantly, resulting in losses.

Since then, however, the company has posted supernormal profits along with other general contractors, like Obayashi Corporation (TSE: 1802), Kashima Construction (TSE: 1812), Shimizu Construction (TSE: 1803), and Taisei Construction (TSE: 1801). Although 2020 Tokyo Olympic related construction is nearing an end, the construction industry is expected to remain strong following the Olympics, mainly with infrastructure reconstruction demand.

For fiscal 2020, Asanuma is expecting revenues of 134,700 million yen ($1,279 million USD, -0.7% YoY) and operating income of 6,270 million yen ($59.6 million USD, +10.0%). 

Shareholders

As of Q1 2020 (ending June 30th, 2019), Asanuma Corporation had 8,078,629 shares issued and 16,549 shares in treasury, putting outstanding shares at 8,062,080.

Here are the major shareholders:

Source: Company filings

Tokyo-based activist fund Strategic Capital owns 715,700 shares through InterTrust according to EDINET filings submitted in August 2019 (Japanese). A June 2019 Nikkei article (Japanese) mentioned that Strategic Capital requested Asanuma to disclose cost of capital information. The company had proactively disclosed the requested information in May, before the annual shareholder meeting in June.

Financials & Valuation

  • Asanuma Corporation is an established mid-tier construction contractor with a project portfolio covering everything from office buildings and medical facilities to water works and tunnels.
  • After the 2011 Tohoku Earthquake, the company recorded operating losses as labor costs rose sharply with reconstruction demand.
  • Since then, however, the company has recorded supernormal profits, and expects continued strong performance going forward.
  • At 3,640 yen per share, Asanuma Corporation trades at an adjusted EV/EBIT of 0.7x with a market capitalization of 27,781 million yen ($264 million USD).
  • Investors can expect an investment CAGR of between 6.0% and 18.3%, inclusive of dividends, over the next three years.

Officially founded in 1892, Asanuma Corporation started out by building schools, temples, and houses. With a particular specialization in schools in its early days, the company was once referred to as “Asanuma the school builder”. Since then, however, the company has expanded its portfolio to include a wide variety of projects, from office buildings and medical facilities to water works and tunnels.

127 years since its founding, Asanuma is now an established mid-tier general contractor. While revenues today are less than what it was prior to the global financial crisis, the company has booked record level profits, and expects continued strong business performance.

At 3,640 yen per share, Asanuma Corporation trades at an EV/EBIT of 2.3x with a market capitalization of 27,781 million yen ($264 million USD). Adjusted for long term investment security holdings, the company trades at 0.7x EV/EBIT.

Additionally, Asanuma has accumulated properties over its existence, owning the land that its Osaka, Tokyo, Nagoya, Sendai, Hiroshima, and Fukuoka offices sit on. The cumulative book value of the land for these properties come out to 1,802 million yen ($17.1 million USD). Our estimates of current market price, based on nearby land value estimates published by the Japanese government, is at 3,577 million yen ($34.0 million USD), with the company’s Tokyo land accounting for half of the market value.

With the larger general contractors (mentioned earlier) trading at unadjusted EV/EBIT multiples of between 3 and 6x, there may not be much room for multiple expansion, especially given Asanuma’s considerably smaller size. Barring another financial crisis, however, continued strong business performance is expected.

Under the assumption that 2019-level business performance continues and EV/EBIT multiples expand to 3x on an adjusted basis, investors can expect an investment CAGR of 18.3%, inclusive of dividends, over three years.

On a more conservative estimate, if we assume EV/EBIT multiples remain at current levels (2.3x unadjusted, 0.7x adjusted), investors can expect an investment CAGR of 6.0%, inclusive of dividends, over three years.

Overall, investors can reasonably expect to gain an investment CAGR of between 6.0% and 18.3%, inclusive of dividends, over the next three years.

The bottom line

Asanuma Corporation is an established mid-tier general contractor with a portfolio covering a wide range of projects, from office buildings and medical facilities to water works and tunnels. Although recent business performance has remained at historically high levels, the company expects continued strong performance going forward. Additionally, the company carries land on its balance sheet at a book value that is significantly below current market prices. With this in mind, investors can expect an investment CAGR of between 6.0% and 18.3%, inclusive of dividends, over a three 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.