Thinking Points

  • Muro Corporation (TSE: 7264) manufactures and sells high precision automotive components, continuous screw tightening machines, and automatic citrus peeler machines
  • The company remains independent, with no capital partnerships with any of the major Japanese automakers.
  • In order to ensure survival, Muro Corporation specifically aims to produce niche products that are often an afterthought for its competitors.
  • At 1,345 yen per share, Muro Corporation trades at 0.6x EV/EBIT with a market capitalization of 8,205 million yen ($74.6 million USD)
  • Investors can expect an investment CAGR of between 7.5% and 11.8%, inclusive of dividends, over the next three years barring cyclical downturns.

Introduction

Muro Corporation (TSE: 7264) manufactures and sells high precision automotive components, continuous screw tightening machines, and automatic citrus peeler machines. Although the company provides segment reporting, it is better to look at revenues by geographic region as over 95% of company revenues are generated through high precision automotive components:

Source: Kenkyo Investing, based on company data


As an independent manufacturer in the automotive industry, Muro Corporation sells to all major Japanese automotive manufacturers and many automotive suppliers, offering over 18,000 products centered around high precision press processed parts. In order to maintain its independence while ensuring survival, the company specifically seeks out niche components to manufacture in order to avoid competition.

The business & environment

Muro Corporation got its start in Tokyo in 1953 selling shims to automotive customers. Six years later in 1959, the company got its first patent for the “Maret Shim” in Japan, Germany and the United States. Later in 1962, Muro opened an office in Nagoya, Japan’s automotive capital.

In 1968, the company set its path toward high precision pressed components when it developed press processing technology for lead frames used in various types of integrated circuits. After incorporating computers to improve efficiency in 1979, Muro spent about a decade modernizing its systems and venturing outside of the automotive industry.

The first step in modernizing Muro’s systems was the implementation of CAD/CAM systems and developing internal software in 1982. This was followed by its first venture outside of the automotive industry in 1986, developing the “Citrus Peeler”, a machine that automatically peels citrus fruits. In the same year, the company developed its first auto feed screw driving system as well.

Today, the company produces over 18,000 different automotive products centered around ultra precision pressed components. Many of the components are for the engine, transmission, and differential gears, making the company more susceptible to a business shift driven by increasing adoption of electric vehicles. This is especially true with engines and transmissions as electric vehicles have motors instead of engines, and oftentimes use single-speed transmission.

With that said, in the broadest sense, Muro Corporation focuses on addressing niche demand that are often an afterthought for its competitors. Although its English website is a little difficult to understand, the company makes this stance clear:

“Muro’s target since our foundation is to cultivate the best technology in a niche business or field that no other companies can handle or are interested in and continue to be a global company with the best technology.”

Muro Corporation has since expanded overseas. Over the last decade or so, the company gradually grew its overseas revenue exposure from 16.1% in FY03/06 to 21.8% in FY03/16, which fell back down to 18.2% in FY03/19.

Source: Kenkyo Investing, based on company data


As with many companies heavily exposed to the automotive industry, Muro went through a period of operating losses related to the 2008-2010 global financial crisis:

Source: Kenkyo Investing, based on company data


While Muro Corporations is set to face challenges with a shift toward electric vehicles, its long-term niche focus and broad range of niche products ought to help the company weather through difficult times should a sudden change in the automotive supply chain take place.

For FY03/20, Muro Corporation forecasts revenues of 21,902 million yen ($199 million USD, +7.5% YoY) and operating profits of 1,331 million yen ($12.1 million USD, -34.4% YoY). As of 1H FY03/20, the company recorded revenues of 10,765 million yen ($97.9 million USD, +5.3% YoY) and operating profits of 705 million yen ($6.4 million USD, -38.8% YoY). 

Although the company managed to grow revenues through 1H FY03/20, this was largely because of its acquisition of Igari Industries. Adjusted for the acquisition, consolidated revenues were down 4.4% YoY. Additionally, raw material prices went up while scrap metal prices went down, resulting in a decline in operating profits.

Shareholders

As of 1H FY03/20 (ending September 30, 2019), Muro Corporation had 6,546,200 shares issued and 504,034 shares in treasury, putting outstanding shares at 6,042,166.

Here are the major shareholders:

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


Intellectual is the founding Muro family’s fund. Combined, the Muro family owns 37.3% of outstanding shares. The founding family’s ownership hasn’t changed in the last five years.

In terms of shareholder returns, Muro Corporation has not performed any meaningful share repurchases. However, the company has paid out dividends consistently, even during challenging times. Its dividend payout ratio has generally remained between 10 and 20% over the last decade.

Financials & Valuation

  • Muro Corporation manufactures and sells high precision automotive components, continuous screw tightening machines, and automatic citrus peeler machines
  • The company remains independent, with no capital partnerships with any of the major Japanese automakers.
  • In order to ensure survival, Muro Corporation specifically aims to produce niche products that are often an afterthought for its competitors.
  • At 1,345 yen per share, Muro Corporation trades at 0.6x EV/EBIT with a market capitalization of 8,205 million yen ($74.6 million USD)
  • Investors can expect an investment CAGR of between 7.5% and 11.8%, inclusive of dividends, over the next three years barring cyclical downturns.

Muro Corporation manufactures and sells high precision automotive components, continuous screw tightening machines, and automatic citrus peeler machines. Over 95% of its revenues is generated in the automotive industry.

Interestingly, the company maintains an independent relationship with Japanese automakers, with no capital partnerships. In order to ensure survival, the company focuses on developing and manufacturing niche products that are an afterthought to its competitors. With this approach, Muro Corporation now maintains over 18,000 products in its lineup.

Operationally, the company is heavily exposed to the automotive industry, making it susceptible to cyclical swings. In fact, the company went through a period of operating losses during the 2008-2010 global financial crisis.

Its balance sheet, however, is effectively debt-free and adequately capitalized with an equity to asset ratio of 0.71. Over the last decade, the company maintained operating margins of 8.2% on average – a respectable margin for a small independent manufacturer in the automotive industry.

Although the company’s ROE often floats around 10% during good times, there is room for improved capital efficiency. Including its long-term investment security holdings, Muro Corporation holds an effective net-cash position.

Overall, Muro Corporation maintains a medium quality business, having considerable exposure to cyclical downturns while maintaining a strong niche focus that’s yielded decent operating margins over time.

At 1,345 yen per share, Muro Corporation trades at 2.2x EV/EBIT with a market capitalization of 8,205 million yen ($74.6 million USD). Adjusted for long-term investment security holdings, the company trades at 0.6x EV/EBIT.

Assuming a fair value EV/EBIT of between 2-3x, investors can expect an investment CAGR of between 7.5% and 11.8%, inclusive of dividends, over the next three years barring cyclical downturns.

The bottom line

Muro Corporation is a niche focused independent auto-parts manufacturer with a history of healthy returns during good times. The company’s strategy of developing products that are an afterthought for its competitors helped it maintain decent returns without capital tie-ups with major auto-makers. Investors can expect an investment CAGR of between 7.5% and 11.8%, inclusive of dividends, over the next three years barring cyclical downturns.


Kenkyo Investing
Kenkyo Investing

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