Thinking Points

  • Ichiken (TSE: 1847) is a mid-tier general contractor in the construction industry, almost exclusively taking on private sector work and mostly building retail-related facilities.
  • The company was tied up with Daiei, a once great Japanese mall operator which has since fallen, but led to Ichiken’s focus on retail facilities.
  • Unlike many of its peers, Ichiken offers start-to-finish construction management, which includes interior finishing, and sometimes even lease contracting.
  • At 1,792 yen per share, Ichiken trades at 1.7x EV/EBIT and 106.6% of NCAV with a market capitalization of 13,001 million yen ($118 million USD)
  • Investors can expect an investment CAGR of anywhere between -5.3% and 21.4%, inclusive of dividends over the next 3 years.

Introduction

Ichiken Construction is a general contractor specializing in the construction and maintenance of retail facilities like grocery stores, restaurants, and leisure sports facilities. Additionally, the company handles facilities like condominiums, nursing homes, and hotels. The company reports through two segments and breaks down sales by Construction, Civil Engineering, and Real Estate. Construction revenues accounted for 99.3% of FY03/19 overall revenues.

The company is on the final year of its medium term management plan, which was revised upwards in FY03/17 when the company exceeded its medium term targets in the first year. More recently, the company is focused on implementing Building Information Modeling (BIM) in its construction process while selectively bidding on profitable projects domestically and performing market research overseas.

The business & environment

Ichiken Construction got its start in 1930 with residential construction. During the first several decades in operation, many of its major projects were in the Kansai region, performing work for customers like Daihatsu Industries (subsidiary of Toyota Motors, TSE: 7203), Isuzu Motors (TSE: 7202), and Hitachi Zosen (TSE: 7004). 

In 1979, Ichiken signed a partnership agreement with Daiei, one of the first and leading shopping center and mall operators in Japan. In the subsequent 15 years, the company managed to expand its sales office network to every major city in Japan, and shift its focus toward the construction and maintenance of retail facilities. 

While Daiei took a turn for the worse in the 1990s and ended up being acquired by Aeon Corporation (TSE: 8267) in 2013 after continuous restructuring efforts, Ichiken remained focused on construction projects for retail facilities. 

Today, Ichiken is considered a mid-tier general contractor. The company almost exclusively works on projects from the private sector, with less than 1% of revenues generated from government-related projects in FY03/19. Generally speaking, the company receives 20% of projects through sole-source contracts and the rest through competitive bidding. In FY03/19, 70% of revenues came from retail-related work.

After a two decade decline in construction investment from 1992, the Japanese government’s investment in construction spiked, delivering a strong 6.6% CAGR growth. Meanwhile, the private sector showed a steady 4.3% CAGR growth since 2012 and on. 

Source: Japan Federation of Construction Contractors

Interestingly, despite its almost exclusively private sector oriented business, Ichiken managed to grow revenues at 7.1% CAGR since 2012, 2.8% above the private sector’s construction investment growth rate of 4.3% during the same period.

Source: Kenkyo Investing, based on company data

Aside from Ichiken’s specialization in retail facilities, it’s difficult to determine any clear competitive advantage the company has over its peers. With that said, it is one of the few general contractors that handles everything from construction to interior work. The company also mentions its implementation of BIM in the construction process, however, this is an industry-wide move with a push by the Japanese government. 

One thing that is clear with Ichiken’s business is that a slow down in the Japanese government’s construction investment has no direct effect on Ichiken, although it would presumably come with second order effects like increased competition for private sector projects from government work oriented peers.

For FY03/20, Ichiken guided for revenues of 88,000 million yen ($800 million USD, -6.2% YoY) and operating profit of 4,100 million yen ($37.3 million USD, -11.2% YoY). As of Q2 FY03/20 (ending September 30, 2019), the company reported revenues of 40,852 million yen ($371 million USD, -0.3% YoY) and operating profit of 2,088 million yen ($19.0 million USD, +11.6% YoY).

Shareholders

As of Q2 FY03/20, Ichiken had 7,278,400 shares issued and 23,698 shares in treasury, putting outstanding shares at 7,254,702.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

Maruhan is an entertainment company mainly engaged in Pachinko hall (a Japanese form of gambling) operations. The company has been Ichiken’s leading shareholder since 2004. However, Ichiken does not perform a significant amount of work for Maruhan. 

One point worth noting is that the Pachinko industry has faced increasingly tight regulations in recent years, with many smaller operators going out of business. According to Maruhan’s website, the company is still profitable, generating an overall operating profit of 33,611 million yen ($305 million USD, or OPM of 2.2%). The company also maintains a decently healthy equity to asset ratio of 0.52. As a side note, Maruhan is a private company and its published financials are unaudited.

Given Maruhan’s current situation, it appears unlikely that the company will find itself to be a forced seller any time soon. However, investors considering Ichiken are best advised to track the well-being of Maruhan given its stake in Ichiken and significant exposure to the increasingly difficult pachinko industry.

Ichiken has not performed any meaningful share repurchases in recent years. The company does have stock options issued, but this accounts for less than 1% of outstanding shares.

Financials & Valuation

  • Ichiken is a mid-tier general contractor in the construction industry, almost exclusively taking on private sector work and mostly building retail-related facilities.
  • The company was tied up with Daiei, a once great Japanese mall operator which has since fallen, but led to Ichiken’s focus on retail facilities.
  • Unlike many of its peers, Ichiken offers start-to-finish construction management, which includes interior finishing, and sometimes even lease contracting.
  • At 1,792 yen per share, Ichiken trades at 1.7x EV/EBIT and 106.6% of NCAV with a market capitalization of 13,001 million yen ($118 million USD)
  • Investors can expect an investment CAGR of anywhere between -5.3% and 21.4%, inclusive of dividends over the next 3 years.

Ichiken is a reputable general contractor with a long history specializing in retail facility construction. The company is also well known for providing start-to-finish construction management, including interior work, which many of its peers do not offer.

In recent years, business performance has been stellar, posting record high operating profits in FY03/18. In fact, the company delivered above-industry growth. The strong performance is even more meaningful when considering the fact that Ichiken takes almost no public sector work, which has been the driving force in the resurgence of the Japanese construction industry over the past several years.

From an operational standpoint, the company delivers a rather standard (for mid-size contractors) operating margin of around 5%. However,  in terms of financial management, the company runs a fairly lean book with an equity-asset ratio of 0.43 and an ROE of 17.2% (TTM). 

At 1,792 yen per share, Ichiken trades at 2.0x EV/EBIT and 121.5% of NCAV with a market capitalization of 13,001 million yen ($118 million USD). Adjusted for long-term investment security holdings, the company trades at 1.7x EV/EBIT and 106.6% of NCAV.

The main difficulty in evaluating Ichiken as an investment lies in the fact that its similarly sized peers like Nakano (TSE: 1827) and Daisue (TSE: 1814) trade at much lower valuations. Both Nakano and Daisue delivered slightly inferior business performance, but trade at or below enterprise value. 

Additionally, at the 10,000 million yen market cap level in Japan, 2-3x EV/EBIT is a decent fair valuation benchmark for an average quality company, even for non-cyclicals. To be sure, the company is perfectly healthy and dividend seeking investors may find Ichiken’s forward dividend yield of 4.5% attractive. As a reference, the forward dividend payout ratio is at 20.7%.

Overall, assuming a fair value EV/EBIT of between 2-3x while also considering normalized business performance, investors can expect an investment CAGR of anywhere between -5.3%% and 21.4%, inclusive of dividends, over a three year period.  

The bottom line

Ichiken is a reputable mid-tier general contractor mainly dealing with private sector work and specializing in retail-related facilities. Unlike many of its peers, the company offers start-to-finish construction management, which includes interior finishings. While Ichiken does show slightly superior operational and financial management characteristics compared to some of its peers, the company seems to also trade at comparatively elevated multiples. Investors can expect an investment CAGR of anywhere between -5.3% and 21.4%, inclusive of dividends over the next 3 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.