Thinking Points

  • Yodogawa Steel Works (TSE: 5451) is an independent steel maker manufacturing and selling steel sheets, building materials, rolls, and gratings as well as offering plant engineering services.
  • While the company has remained consistently profitable at the operating level, there are some red flags like price-fixing and data falsification which raises concerns over Yodogawa’s competitive advantages (or lack thereof).
  • At the same time, the company appears rather shareholder conscious, consistently paying out dividends and performing share repurchases.
  • At 2,038 yen per share, Yodogawa Steel Works trades at 50.8% of NCAV with a market capitalization of 60,073 million yen ($548 million USD).
  • With a fair value P/NCAV of between 80% and 100%, investors can expect an investment CAGR of between 8.1% and 16.7%, inclusive of shareholder returns, over the next 5 to 8 years.

Introduction

Yodogawa Steel Works (TSE: 5451) manufactures and sells steel sheets, building materials, rolls, and gratings. Additionally, the company offers plant engineering services worldwide. Yodogawa categorizes revenues into 4 segments: Steel Plate, Grating, Roll, and Real Estate. However, it’s more useful to assess revenue by region as the Steel Plate segment accounted for 95% of revenues in FY03/19:

Source: Kenkyo Investing, based on company data

In recent years, Yodogawa mainly worked on further developing its core colored steel plate business domestically and expanding its steel plate business overseas. The company is in its final year of its FY03/18 – FY03/20 medium term management plan, which didn’t outline financial targets.

The business & environment

Yodogawa Steel Works was founded in 1935 in Osaka for the purpose of manufacturing steel plates and materials. In 1940, the company acquired a galvanized sheet metal manufacturer, adding galvanizing (rust resistant coating) capabilities to its offering.

In 1948, Yodogawa built an electric furnace and a reverberating furnace for the purpose of manufacturing steel castings and rolls. In 1973, the company started manufacturing gratings, more or less shaping its offerings today.

Although the company had done business with various overseas companies since the 1960s, Yodogawa’s first leap into overseas operations didn’t come about until 1987, when it invested in a Taiwanese steel company. Later on, the company added Thailand (1999) and China (2004) to the list.

Today, Yodogawa operates four manufacturing facilities in Japan and one facility each in Taiwan, Thailand, and China. In the ten-year period between FY03/10 and FY03/19, its foreign operations accounted for between 31.4% and 39.3% of overall revenues.

Source: Kenkyo Investing, based on company data

Interestingly, Yodogawa’s profitability fluctuates quite a bit depending on raw material prices and foreign exchange rates. With that said, the company has remained consistently profitable even through the 2008 – 2010 global financial crisis.

Source: Kenkyo Investing, based on company data

One of Yodogawa’s key initiatives, which extends beyond the company’s FY03/18 – FY03/20 medium term management plan, is to build a consistent recurring profit base of 10,000 million yen ($91 million USD) regardless of business environment factors like exchange rates or industry downturns by 2025.

Aside from the period’s initially planned investment total of 15,000 million yen ($137 million USD) and dividend policy of a minimum of 50 yen per share (with dividend payout ratio of 30 to 50%), the medium term management plan lists qualitative goals, and it is difficult to gauge whether Yodogawa is moving toward the consistent 10,000 million yen recurring profit base it is aiming for.

The company does note its focus on value-added offerings such as color-coated steel plates and product development for niche markets as well as its overseas business focus on Asia.

Separate from Yodogawa’s business performance, investors should be aware of the fact that Yodogawa falsified quality-related data in its Roll business in late 2018. This was an industry-wide problem which received widespread media coverage following competitor Kobe Steel’s (TSE: 5406) scandal regarding quality-related data fraud.

Looking back further to 2009, Yodogawa was involved in a price-fixing cartel and slapped with a 3,676 million yen ($33.5 million USD) fine by the Japanese Fair Trade Commission, which resulted in the net loss reported in FY03/10. Net losses reported in FY03/16 was mainly a function of impairment charges on equipment for the company’s China business.

Yodogawa management has not provided full-year forecasts since FY03/17. As of Q2 FY03/20, the company reported revenues of 78,261 million yen ($714 million USD, -6.5% YoY) and operating profits of 2,906 million yen ($26.5 million USD, -4.8% YoY).

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Yodogawa had 35,837,230 shares issued and 6,361,450 shares in treasury, putting outstanding shares at 29,475,780.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei data

There is no single shareholder with control over Yodogawa. 

Sadoshima is a trading company which is also Yodogawa’s biggest customer, accounting for 20.2% of FY03/19 revenues. At the same time, Yodogawa controls 50% of voting rights for Sadoshima.

JFE Steel (TSE: 5411) and Posco (KRX: 005490) are both peers in the global steel industry.

As far as shareholder returns go, Yodogawa has been remarkably consistent with both dividend payouts and share repurchases, a rare combination for a Japanese company. In the ten year period between FY03/10 and FY03/19, the company spent 16,708 million yen ($152 million USD) on dividend payouts and 9,238 million yen ($84.3 million USD) on share repurchases, or a total of 25,946 million yen ($237 million USD). As a reference, the company’s current market capitalization is at 60,073 million yen ($548 million USD).

Financials & Valuation

  • Yodogawa Steel Works is an independent steel maker manufacturing and selling steel sheets, building materials, rolls, and gratings as well as offering plant engineering services.
  • While the company has remained consistently profitable at the operating level, there are some red flags like price-fixing and data falsification which raises concerns over Yodogawa’s competitive advantages (or lack thereof).
  • At the same time, the company appears rather shareholder conscious, consistently paying out dividends and performing share repurchases.
  • At 2,038 yen per share, Yodogawa Steel Works trades at 50.8% of NCAV with a market capitalization of 60,073 million yen ($548 million USD).
  • With a fair value P/NCAV of between 80% and 100%, investors can expect an investment CAGR of between 8.1% and 16.7%, inclusive of shareholder returns, over the next 5 to 8 years.

Yodogawa Steel Works is an established mid-tier steel maker with strengths in coated steel sheets. Additionally, the company manufactures and sells building materials, rolls, and gratings, and offers plant engineering services.

As expected from a business dealing with commodities, Yodogawa’s business performance is heavily dependent on raw material prices and its ROE is at a low 5.0% even at peak performance (FY03/18). This automatically rules Yodogawa out as a high quality business. 

Furthermore, the company was caught for price-fixing and quality data falsification in the last decade. What makes company quality assessment difficult is this sort of negative factors combined with Yodogawa’s remarkably consistent shareholder return efforts. 

Although Yodogawa posted net losses in FY03/10 (fines for price-fixing) and FY03/16 (impairment charges for China business), the company has remained consistently profitable at the operating level. With this in mind, it’s fair to say Yodogawa’s operating business quality is somewhere between low and medium quality.

While delivering consistent shareholder returns and questionable operational practices, the company also managed to keep its equity-asset ratio between 0.65 and 0.75 over the last decade. Yodogawa has remained effectively debt-free for over a decade.

At 2,038 yen per share, Yodogawa Steel Works trades at 76.1% of NCAV with a market capitalization of 60,073 million yen ($548 million USD). Adjusted for long-term investment security holdings, the company trades at 50.8% of NCAV.

Put frankly, 50.8% of NCAV is about as deep value as it gets in Japan. Considering Yodogawa’s almost net-cash balance sheet and 39,453 million yen ($360 million USD) in long-term investment security holdings, it’s fair to assume that the company’s shareholder return efforts will continue as long as the business remains profitable.

Assuming a fair value P/NCAV of between 80% and 100%, investors can expect an investment CAGR of between 8.1% and 16.7%, inclusive of shareholder returns, over the next 5 to 8 year period.

The bottom line

Yodogawa Steel Works is an established mid-tier steel maker with a strength in coated steel plates. Although the company comes with some red flags like price-fixing and data falsification in the past, it has consistently remained operationally profitable, and performed continuous shareholder return efforts. At today’s price of 2,038 yen per share and a fair value P/NCAV of between 80% and 100%, investors can expect an investment CAGR of between 8.1% and 16.7%, inclusive of shareholder returns, over the next 5 to 8 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.