Thinking Points

  • Takachiho Koheki (TSE: 2676) is a trading company specializing in system equipment, mechanical parts, and semiconductors.
  • More recently, the company is focusing more on security-related system equipment and less on semiconductor-related products.
  • Although business performance deteriorated significantly after the global financial crisis, particularly with Electronics sales, the company’s security focus combined with enhanced customer support functions has led to a recovery in operating performance.
  • At 1,086 yen per share, Takachiho Koheki trades at an adjusted EV/EBIT multiple of 2.5x with a market capitalization of 9,689 million yen ($91.1 million USD).
  • Investors can expect an investment CAGR of ~4.7%, inclusive of dividends, over the next three years.

Introduction

Takachiho Koheki (TSE: 2676) is a trading company specializing in system equipment, mechanical parts, and semiconductors. The company operates through two segments: System Equipment and Devices. Takachiho further reports sales by subsegment:

Source: Kenkyo Investing, based on company data

The Electronics subsegment used to dominate Takachiho’s sales distribution until about ten years ago. More recently, the company has been focused on building its Security subsegment, which offers consulting and system design services as well as product monitoring, video surveillance, and fire protection products.

The business & environment

Takachiho Koheki was founded in Osaka in 1952 to import, sell, and provide support for construction equipment. Several months after its founding, the company signed a distributorship agreement with Burroughs Adding Machine (now part of UNISYS, NYSE: UIS) to sell adding machines in Japan.

In 1962, the company opened an office in Detroit (where Burroughs was headquartered) and New York City. Subsequently in 1963, Takachiho became the first to sell Optical Character Recognition (OCR) systems in Japan. Then in 1968, the company was the first to introduce key-to-tape data entry machines. 

Starting out in construction equipment, Takachiho quickly switched gears to advanced electronics, and continued introducing new technologies to the Japanese markets. In 1970, the company made its first foray into security systems when it became the first to introduce a product monitoring system.

Today, Takachiho’s business operates out of two main segments: System Equipment and Devices.

For the System Equipment segment, the company operates three subsegments: Security, Other Solutions, and Customer Support. The security subsegment mainly consists of consulting and system design services as well as product monitoring, video surveillance, and fire protection products. The other solutions subsegment consists of a variety of products, from networking equipment and RFID tags for inventory management to mail inserting systems and design and implementation services for advanced electronics. The customer support subsegment mainly offers system design, equipment installation and maintenance, and outsourced system operation services.

For the Devices segment, the company operates two subsegments: Electronics and Industrial. The electronics subsegment mainly consists of analog integrated circuits like silicon microphones and other sensory products. Additionally, the subsegment offers sales and consulting services for electronic components. Offerings for the industrial subsegment mainly consists of mechanical components, like slide rails, gas springs, and elevating mechanisms. 

While the electronics subsegment was historically dominant, the company shifted focus to its security subsegment after the 2008-2010 global financial crisis. 

Source: Kenkyo Investing, based on company data

According to the most recent medium term management plan (~FY03/22), Takachiho is targeting revenues of 26,000 million yen ($244 million USD, +9.3% CAGR) and operating profits of 1,800 million yen ($16.9 million USD, +22.1% CAGR). 

The company will mainly focus on value-added product sales and global expansion. It reorganized subsegments for the System Equipment segment by customer industry  in order to better track performance. The new subsegments are: Retail, office, global, and service & support. 

Source: Kenkyo Investing, based on company data

Takachiho is particularly focused on selling productivity improvement, sales support, and RFID solutions for retailers and offering cloud services like remote maintenance and monitoring services in the System Equipment segment. In other words, the company will continue with its security focus and strengthen its customer support offerings. For the Device segment, the company plans to focus on cross-sales for the electronics subsegment and selling products (vs. components) for the industrial subsegment. 

Takachiho’s global focus is on Hong Kong/China, Thailand, and the United States. The company will focus on soft-motion units (for appliances and automotive) in Hong Kong/China, fire protection equipment for power plants in Thailand, and high-end Japanese products (for appliances and manufacturing equipment) in the United States.

 For FY03/20, the company is expecting revenues of 22,100 million yen ($208 million USD, +11.1% YoY) and operating profit of 1,200 million yen ($11.3 million USD, +21.3% YoY). As of Q1 FY03/20, revenues were up 20.1% YoY and the company booked operating profits of 81 million yen ($762K USD) compared to operating losses of 50 million yen ($470K USD) in Q1 FY03/19.

Shareholders

As of Q1 FY03/20 (ending June 30, 2019), Takachiho had 10,171,800 shares issued and 1,266,036 shares in treasury, putting outstanding shares at 8,905,764.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

Mars Group Holdings (TSE: 6419) primarily develops and sells systems to the pachinko and pachislot industry in Japan. While the company remains profitable as of FY03/19, the industry has faced tightening regulations, resulting in an industry-wide decline in revenues and profits. The company maintains a strong balance sheet with a high cash position, however, if the operating business starts generating losses, the company may be compelled to sell its stake.

Secom (TSE: 9735) is Japan’s largest security services company. Secom and Takachiho have been business partners since 2005. With Takachiho focused on security system equipment, it’s highly likely that the two companies will remain partners for the foreseeable future.

Currently, there are 177,000 shares (~2.0% of outstanding shares) worth of unexercised stock options outstanding. 75,000 have a strike price of 1,153 yen per share and the rest are not exercisable until August 2021.

The company repurchased shares in three of the last five fiscal years (FY03/16, FY03/17, and FY03/19) with the stated purpose of improving capital efficiency. 

Source: Kenkyo Investing, based on company disclosures

Financials & Valuation

  • Takachiho Koheki is a trading company specializing in system equipment, mechanical parts, and semiconductors.
  • More recently, the company is focusing more on security-related system equipment and less on semiconductor-related products.
  • Although business performance deteriorated significantly after the global financial crisis, particularly with Electronics sales, the company’s security focus combined with enhanced customer support functions has led to a recovery in operating performance.
  • At 1,086 yen per share, Takachiho Koheki trades at an adjusted EV/EBIT multiple of 2.5x with a market capitalization of 9,689 million yen ($91.1 million USD).
  • Investors can expect an investment CAGR of ~4.7%, inclusive of dividends, over the next three years.

Originally founded to import, sell, and provide support for construction equipment, Takachiho’s business took a sharp turn when it signed a distributorship agreement with US-based Burroughs Adding Machine.

From then on, the company quickly switched to importing, selling, and supporting advanced electronics. Takachiho was the first to introduce key technologies like OCR systems, key-to-tape data entry machines, and product monitoring systems.

Leading up to the global financial crisis, the company had a sizable electronics business that sold analog integrated circuits and sensory devices. After the crisis, Takachiho shifted its focus to security-related systems and customer support functions, gradually recovering operating performance to pre-crisis levels. Going forward, the company plans to continue with its security and customer support focus while extending its reach globally.

At 1,086 yen per share Takachiho trades at an EV/EBIT multiple of 3.4x with a market capitalization of 9,689 million yen ($91.1 million USD). Adjusted for long-term investment holdings, the company trades at 2.5x EV/EBIT.

Despite its gradually recovering business performance, it’s difficult to give Takachiho more than a 3x EV/EBIT valuation given the scale of the company. Assuming the company maintains performance and dividend payouts at current levels, investors can expect an investment CAGR of 4.7%, inclusive of dividends, over the next three years.

The bottom line

Takachiho Koheki is specialized trading company that once focused on importing, selling, and supporting electronics like analog integrated circuits and sensory devices. After the global financial crises, the company shifted its focus to security-related systems and customer support functions. Albeit gradual, Takachiho has been on a recovery track, delivering near pre-crisis level performance recently. At 1,086 yen per share, investors can expect an investment CAGR of 4.7%, 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.