Thinking Points

  • Tokyo Automatic Machine Works (TSE: 6360) designs, manufactures, and sells customized packaging and production machinery.
  • The company got its start by making machines for cigarette production over 100 years ago, then expanded into packaging machinery, which is now a core part of the business.
  • Its business performance has fluctuated historically, with one customer often accounting for over a third of annual revenues.
  • At 1,650 yen per share, Tokyo Automatic Machine Works trades at an adjusted 1.7x EV/EBIT with a market capitalization of 2,316 million yen ($21.2 million USD).
  • Investors are best advised to avoid investing in the company at today’s prices, especially considering the less than decent business quality and not particularly noteworthy asset quality.

Introduction

Tokyo Automatic Machine Works (TSE: 6360, hereby referred to as TAM) manufactures and sells packaging machinery and production machinery. As such, the company reports under two segments: Packaging Machinery and Production Machinery.

Source: Kenkyo Investing, based on company data

TAM generally designs and manufactures customized machinery to help customers automate processes. Historically, the company focused on packaging machinery and production machinery. More recently, however, the company is focused on expanding its geographical footprint as well as its business domain, with a particular focus on building its baler and powder filling machine businesses.

The business & environment

Tokyo Automatic Machine Works was founded in 1908 in Tokyo by Yasunosuke Shimane. The company originally built machines for cigarette production, but shifted its focus to packaging machinery in the 1950s when it introduced a cellophane packaging machine.

The company then proceeded to introduce a variety of machines, mainly packaging machines, including film wrapping machines, gift wrapping machines, vertical pillow packaging machines, and more. At the same time, it built a domestic support network with offices in Sapporo, Osaka, Fukuoka, Nagoya, and Chiba. 

Meanwhile, TAM continued with the production of its cigarette machines. In fact, the company makes the world’s fastest cigarette filter plug delivery machine, according to its website. More recently, the company shifted focus on expanding its business internationally and venturing into new areas of machinery. More specifically, TAM is focused on developing its baler and powder filling machine businesses.

Historically, TAM’s revenues have fluctuated wildly:

Source: Kenkyo Investing, based on company data

Much of the fluctuation is due to the demand of TAM’s largest customer, Johnson & Johnson Vision, which accounted for 53.4% of revenues in FY03/19.

Source: Kenkyo Investing, based on company data

Overall, non-J&J revenues tend to be more stable than J&J revenues. While non-J&J revenues have been strong in recent years, it’s still lower than pre-financial crisis levels. Meanwhile, the recent surge in revenues was clearly attributable to J&J Vision. Operating profits grew significantly along with revenues:

Source: Kenkyo Investing, based on company data

Although TAM’s business performance is clearly dependent on J&J Vision, the company’s focus on customized solutions and customer concentration is by design. The company specifically mentions this as a basic operating policy in its FY03/19 – FY03/21 medium term management plan.

For its overseas business expansion, however, TAM plans to further strengthen ties with distributors and partners. Overall, the company aims to generate 26,500 million yen ($243 million USD) in revenues and 830 million yen ($7.6 million USD) in operating profits by FY03/21.

For FY03/20, the company is targeting 10,000 million yen ($91.7 million USD, -14.2% YoY) in revenues and 400 million yen ($3.7 million USD, -35.2% YoY) in operating profits. As of Q2 FY03/20, the company generated 5,207 million yen ($47.7 million USD) in revenues and 204 million yen ($1.9 million USD) in operating profits.

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Tokyo Automatic Machine Works had 1,452,000 shares issued and 52,385 shares in treasury, putting outstanding shares at 1,399,615.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data

Japan Tobacco (TSE: 2914), which was TAM’s first customer from over 100 years ago, is the leading shareholder with a 9.6% stake. Tokyo Shisetsu Kogyo is an affiliate company and TAM controls 30.1% of voting rights in the company. Other stakeholders of Tokyo Shisetsu Kogyo are Japan Tobacco and Tokyo Shisetsu Kogyo ESOP.

There are no outstanding stock options.

Financials & Valuation

  • Tokyo Automatic Machine Works designs, manufactures, and sells customized packaging and production machinery.
  • The company got its start by making machines for cigarette production over 100 years ago, then expanded into packaging machinery, which is now a core part of the business.
  • Its business performance has fluctuated historically, with one customer often accounting for over a third of annual revenues.
  • At 1,650 yen per share, Tokyo Automatic Machine Works trades at an adjusted 1.7x EV/EBIT with a market capitalization of 2,316 million yen ($21.2 million USD).
  • Investors are best advised to avoid investing in the company at today’s prices, especially considering the less than decent business quality and not particularly noteworthy asset quality.

Tokyo Automatic Machine Works has designed, manufactured, and sold machines for over 100 years. Starting with machines for cigarette production, the company gradually expanded its business area into packaging machinery. 

More recently, TAM is focused on further expanding its business area to include baler and powder filling machines. Additionally, the company plans to grow its overseas business through partnerships and distributors.

TAM’s business today is heavily dependent on its biggest customer, Johnson & Johnson Vision. In FY03/19, J&J Vision accounted for 53.4% of company revenues. The high level of customer concentration is by design as TAM builds customized machinery, often for long-time customers. 

Although it’s fair to say that TAM’s relationships with its customers are more than healthy (particularly with J&J Vision), this is not necessarily benefiting TAM. Over the last decade, the best operating performance TAM recorded was in FY03/19, when operating margins were at 5.3%. Gross margins tend to float around the 20% mark, which seems low for highly customized, highly technical solutions.

Meanwhile, TAM’s business is heavily dependent on J&J Vision’s capital investment plans. FY03/11 was a particularly difficult year as J&J Vision related work took a steep decline, resulting in operating losses of 330 million yen ($3.0 million USD). Hence, TAM’s operating business quality is somewhere between poor and mediocre.

While the company isn’t financially weak by any means, its equity-to-asset ratio of 0.38 makes the company less attractive than the pool of net-net opportunities with decent operating businesses available in Japan. 

At 1,650 yen per share, Tokyo Automatic Machine Works trades at 4.0x EV/EBIT with a market capitalization of 2,316 million yen ($21.2 million USD). Adjusted for long-term investment security holdings, the company trades at 1.7x EV/EBIT.

To be sure, TAM’s EBIT figure has been elevated in FY03/19 and so far through Q2 FY03/20 compared to historical norms. A 10-year normalized EBIT figure puts adjusted EV/EBIT around 7.4x, a high multiple for a nanocap with a less than decent operating business and no notable excess assets. 

For this reason, investors are best advised to avoid investing in Tokyo Automatic Machine Works at 1,650 yen per share. The company is worth another look if share prices fall below 850 yen. However, given the less than decent business quality and not particularly noteworthy asset quality, there is no need to keep TAM on a watchlist.

The bottom line

Tokyo Automatic Machine Works is an established packaging and production machinery maker with over 100 years of history. The company specializes in customized machinery, with its business primarily dependent on a single customer. While TAM appears to maintain healthy relationships with its customers, this hasn’t tied into decent business performance for the most part. With a less than decent operating business and not particularly noteworthy asset quality, investors are best advised to avoid investing in Tokyo Automatic Machine Works at this point.


Kenkyo Investing
Kenkyo Investing

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