Thinking Points

  • Kudo Corporation (TSE: 1764) is primarily a construction company, but also provides building maintenance services and operates a real estate and nursing home business.
  • Over the years, the company has diversified its business operations, which helped the company sail through the 2008-2010 global financial crisis profitably despite a struggling construction operation.
  • With that said, Kudo Corporation is still influenced by outside factors like the nursing care fee revisions and cyclical swings in the construction industry.
  • At 2,409 yen per share, Kudo Corporation trades at an adjusted 2.9x EV/EBIT with a market capitalization of 2,750 million yen ($25.7 million USD).
  • Investors are best advised to keep Kudo Corporation on a watchlist and revisit the company if share prices go below 1,500 yen, or about 2.0x adjusted EV/EBIT.

Introduction

Kudo Corporation (TSE: 1764) is a full-service construction company handling every step of construction and property management including land vetting, design, construction contracting, property management, and renovations. The company operates through four segments:

Source: Kenkyo Investing, based on company data

The company primarily operates out of Tokyo and Kanagawa prefectures. In addition to its construction and property management businesses, Kudo Corporation also operates elderly care and nursing facilities. 

The business & environment

Kudo Corporation was originally started as a water purification plant in 1966 by Yukimitsu Kudo. Five years later, a new company was formed as a regional construction subcontractor to help develop Yokohama City and the Kanagawa area, which marked the beginning of the current Kudo Corporation. 

Later expanding into neighboring Tokyo, Kudo Corporation focused on developing Kanagawa prefecture. It mainly operated as a typical construction contractor, taking on general construction, civil engineering, pavement construction, and water facilities construction work.

The company’s first venture outside of construction was in 1991, when it first developed and started selling condominium units. Kudo Corporation proceeded to expand its residential development business, selling Florence Palace branded condominiums and Florence Garden branded single-family homes (not a development, but individual homes).

In 2003, the company built its first elderly day care facility Florence Care Takatsu. This was promptly followed by building out five nursing care facilities in four years. Kudo Corporation then proceeded to expand into the building management business in 2007.

Since 2010, the company has operated through four segments: Construction, Real Estate, Building Management, and Nursing. 

Source: Kenkyo Investing, based on company data

Interestingly, the company did not provide a segment breakdown in 2009, but provided segment breakdowns prior to that. The chart below is created by using data from the income statement to fill in the missing segment breakdowns. Keep in mind, the building management business was included in the Real Estate segment prior to 2009/2010:

Source: Kenkyo Investing, based on company data

What’s particularly interesting about Kudo Corporation’s business performance is the 2008-2010 global financial crisis period. Performance for its mainstay Construction segment deteriorated considerably while the Nursing and Building Management segments delivered stable performance. Again, the Building Management business was nested under the Real Estate segment prior to 2009/2010. Overall, the company was able to profitably push through the global financial crisis.

Source: Kenkyo Investing, based on company data

After the global financial crisis, however, business performance deteriorated. This was largely driven by a shrinking Real Estate business and contracting margins for the Nursing business. The company has increasingly become selective about land and properties to develop. Meanwhile, the Nursing segment, which largely depends on payouts from the National Health Insurance program, was pressured by upfront costs for facility openings, low occupancy rates, and a shrinkage of nursing care fees due to the nursing care fee revisions (every 3 years) resulting in lower payouts. 

Source: Kenkyo Investing, based on company data

More recently, in 2018, the nursing care fee review resulted in an increase in payouts. Moreover, occupancy rates are at higher levels, resulting in normalized business performance. Meanwhile, the Real Estate segment is virtually non-existent as of fiscal 2019.

For fiscal 2020, Kudo Corporation is expecting revenues of 19,235 million yen ($180 million USD, -2.4% YoY) and operating profit of 635 million yen ($5.9 million USD, -42.7% YoY). While the company did not specifically address the expected decline in operating profits for 2020, this is likely due to the fact that there was a major delivery in the Construction segment which greatly improved operating profits for 2019.

Shareholders

As of fiscal 2019 (ending June 30, 2019), Kudo Corporation had 1,331,220 shares issued and 189,495 shares in treasury, putting outstanding shares at 1,141,725.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei

Top is a Kudo family fund. As a part of a share repurchase program, Top sold 155,000 shares to Kudo Construction at 2,630 yen per share for a total purchase price of 408 million yen ($3.8 million USD). The family, however, still owns 55.2% of outstanding shares.

The company offers no management equity compensation and has no unexercised stock options outstandings.

Financials & Valuation

  • Kudo Corporation is primarily a construction company, but also provides building maintenance services and operates a real estate and nursing home business.
  • Over the years, the company has diversified its business operations, which helped the company sail through the 2008-2010 global financial crisis profitably despite a struggling construction operation.
  • With that said, Kudo Corporation is still influenced by outside factors like the nursing care fee revisions and cyclical swings in the construction industry.
  • At 2,409 yen per share, Kudo Corporation trades at an adjusted 2.9x EV/EBIT with a market capitalization of 2,750 million yen ($25.7 million USD).
  • Investors are best advised to keep Kudo Corporation on a watchlist and revisit the company if share prices go below 1,500 yen, or about 2.0x adjusted EV/EBIT.

Kudo Corporation originally started as a water purification plant in Kanagawa prefecture in 1966. The company quickly converted to a construction company in 1971. From there on the company diversified its business operations to include residential development, building management, and nursing care.

The diversification efforts paid off during the 2008-2010 global financial crisis, when the company managed to sail through profitably. With that said, Kudo Corporation is not immune to outside pressures, with the cyclical swings in the construction industry and its nursing care business affected by the nursing care fee revision conducted by the national government every three years.

Unlike many of its peers in the construction industry, Kudo Corporation maintains a relatively lean balance sheet with an equity to asset ratio of 0.3. Moreover, the company generally pays out about 30% of its net income in dividends each year.

At 2,409 yen per share, Kudo Corporation trades at 3.1x EV/EBIT with a market capitalization of 2,750 million yen ($25.7 million USD). Adjusted for long-term investment security holdings, the company trades for 2.9x EV/EBIT. 

While capital allocation and shareholder return efforts for Kudo Corporation is respectable, the company is fairly valued at best at today’s 2.9x adjusted EV/EBIT, especially given the company’s size and the management’s full-year forecast for fiscal 2020. Investors are best advised to keep Kudo Corporation on a watchlist and revisit the company if the share price goes below 1,500 yen (~2x adjusted EV/EBIT).

The bottom line

Kudo Corporation is primarily a construction company which has managed to diversify its business operations to include building management services, real estate development, and nursing care operations. While its capital allocation and shareholder return efforts are respectable, the 2.9x adjusted EV/EBIT price puts the company at fair value at best. Hence, investors are advised to put Kudo Corporation on a watchlist and revisit the company if the share price goes below 1,500 yen (~2.0x adjusted EV/EBIT).


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.