Thinking Points

  • Kunimine Industries (TSE: 5388) is a leading bentonite mining company with various bentonite related manufacturing capabilities.
  • While the automotive, industrial machinery, and civil engineering and construction industries are its key end markets, the company proactively develops new bentonite products to serve other industries such as agriculture, cosmetics, paint and coatings, etc.
  • Its near term outlook is bleak with expectations of a slowdown in the automotive industry leading to severe declines in profits, but the company is well capitalized and prepared for a downturn.
  • At 958 yen per share, Kunimine Industries trades at an EV/EBIT of 2.4x with a market capitalization of 12,360 million yen ($117 million USD).
  • Kunimine Industries currently trades at fair value, and investors should revisit the company if share prices fall to the 700 yen level.

Introduction

Kunimine Industries (TSE: 5388) is engaged in the mining and selling of bentonite as well as the manufacturing and selling of Bentonite-related products. The company operates through three segments: Bentonite, Agrochemical, and Fine Chemicals: 

Source: Kenkyo Investing, based on company data

Although Kunimine Industries owns and operates three mining companies in Japan, its competitive strength lies in its focus on developing various unique bentonite applications such as pet litter, drilling mud for the construction industry, binder material for automotive castings, and additives and agrochemicals for agricultural products. More recently, the company is working on developing gas barrier related products such as for packaging materials and protective coats. Additionally, in terms of geographical growth, the company expanded into Thailand in 2015 with aims to grow its business in the Southeast Asia region in general.

The business & environment

Kunimine Industries was founded in 1946 and started mining bentonite as well as manufacturing and selling processed bentonite. The company’s first venture into downstream applications was in 1963, when it produced agricultural additives. 

Often referred to as a “clay of a thousand uses”, bentonite has swelling and thickening properties, among many other properties and is used in everything from agricultural additives and binder materials to pet litters and cosmetics. It is formed naturally through the weathering of volcanic ashes and can be collected through open pit or underground mining. 

Some Japanese sources note that Kunimine Industries is the largest bentonite miner in Japan with about a 50% market share. Whether this is true or not matters less as the company’s biggest strength is its vertically integrated supply chain from bentonite mines to manufacturing processed and finished products.

The company operates through three segments: Bentonite, Agrochemical, and Fine Chemicals. The Bentonite segment primarily sells bentonite for the automotive, industrial machinery, and civil engineering and construction industries. Additionally, the company’s cat litter products are included in this segment. For the automotive and industrial machinery industries, the company sells bentonite for use in making casting molds while also offering engineering support services to efficiently plan and use bentonite. For civil engineering and construction, the bentonite is mainly for mixing with drilling mud when performing foundation or other boring related work. As for the cat litter products, the company makes its own line of cat litter products using bentonite’s clumping characteristics.

The Agrochemical segment started by selling bentonite-based clay/expander as a base for use in agrochemical formulation, then proceeded to focus on contract manufacturing of granular agrochemicals for agrochemical producers. The agrochemicals produced include herbicides, germicides, plant growth regulators, and agrochemical bases. The Fine Chemicals segment produces various chemicals for use in cosmetics, paint, ink, resin fillers, and papermaking.

Source: Kenkyo Investing, based on company data

Source: Kenkyo Investing, based on company data

The core Bentonite segment is clearly the lifeblood of Kunimine Industries with the Agrochemical segment offering high margin revenues. On the other hand, the Fine Chemicals segment has generated low margins recently. This is mostly due to the company bringing a second factory online for its flagship Kunipia products, which increased depreciation expenses. Given recent revenue growth in the Fine Chemicals segment and previously higher margins, it’ll be interesting to see how profitability grows over the next few years.

What’s particularly interesting about Kunimine Industries’ historical performance is that it generated losses ahead of the global financial crisis while recording revenue growth. This was mainly due to the rise in crude oil prices affecting raw material costs. Given the current oil market environment, this does not pose an issue, however, investors should keep in mind that a rise in oil prices significantly affect the company.

The company’s biggest recent focus has been on overseas expansion for the Bentonite segment, improvement in granulation technology for the Agrochemical segment, and development of new uses for the core Kunipia product line for the Fine Chemical segment.

While Kunimine Industries’ long-term prospects seem promising, the company’s outlook for FY03/21 calls for lower revenues and profits across all segments. For FY03/21, Kunimine Industries expects revenue of 12,683 million yen ($120 million USD, -17.8% YoY) and operating profits of 664 million yen ($6.3 million USD, -65.6% YoY). 

Much of this is due to an expected significant slowdown in the automotive industry and increased expenses related to resource mapping and mining technology development for the Bentonite segment. 

Shareholders

As of FY03/20, Kunimine Industries had 14,450,000 shares issued and 1,548,395 shares in treasury, putting outstanding shares at 12,901,605.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

Kunimine Enterprise is the founding family’s fund while Kunimine Business Association consists of the company’s vendors and customers. 

Although the company most recently repurchased shares in FY03/20, it also issued shares in FY03/18 and FY03/15 despite its already well capitalized balance sheet. In fairness, the capital raised in FY03/18 was allocated to building the company’s new Kunipia factory.

Financials & Valuation

  • Kunimine Industries is a leading bentonite mining company with various bentonite related manufacturing capabilities.
  • While the automotive, industrial machinery, and civil engineering and construction industries are its key end markets, the company proactively develops new bentonite products to serve other industries such as agriculture, cosmetics, paint and coatings, etc.
  • Its near term outlook is bleak with expectations of a slowdown in the automotive industry leading to severe declines in profits, but the company is well capitalized and prepared for a downturn.
  • At 958 yen per share, Kunimine Industries trades at an EV/EBIT of 2.4x with a market capitalization of 12,360 million yen ($117 million USD).
  • Kunimine Industries currently trades at fair value, and investors should revisit the company if share prices fall to the 700 yen level.

Kunimine Industries started out as a bentonite mining company, gradually worked its way through the supply chain, and now manufactures  a wide variety of bentonite related products. Today, it’s the leading bentonite miner and manufacturer in Japan with aims to expand globally.

The company maintains a well capitalized balance sheet with an equity to asset ratio of 0.83. Given that the company raised capital by selling treasury shares in FY03/18 to build a new factory despite a more-than-healthy balance sheet, it’s safe to say the management is strongly conservative. With that said, large scale share repurchases aren’t out of the question as the company spent 1,378 million yen ($13 million USD) repurchasing 1,546,500 shares, or 10.7% of outstanding shares. Moreover, dividend payouts have been consistent with the exception of FY03/09 and FY03/10, when the business environment was particularly challenging.

At 958 yen per share, Kunimine Industries trades at an EV/EBIT of 3.0x with a market capitalization of 12,360 million yen ($117 million USD). Adjusted for long-term investment holdings, the company trades for 2.4x EV/EBIT. It’s important to note here that the EV/EBIT multiple is on a trailing basis and the company expects business performance to deteriorate dramatically in the near term. 

Based on the company’s FY03/21 operating profit forecast, the company trades at an adjusted EV/EBIT of 8.9x. Additionally, the company is expecting the challenging business environment to continue for three years. Aside from coronavirus concerns, the cyclical nature of the automotive industry not only suggests that Kunimine Industries is currently trading at fair value, but also that investors may find a better entry point when the industry slows down. Investors ought to revisit Kunimine Industries should share prices fall below the 700 yen per share level.

The bottom line

Kunimine Industries is a leading bentonite mining company and bentonite related product manufacturer on track to expand its overseas business. While the company has unique strengths such as its vertically integrated operations, its biggest end market is the automotive industry. Given the cyclical nature of its end market, Kunimine Industries currently trades at fair value, and investors are encouraged to revisit the company should share prices fall to the 700 yen level.


Kenkyo Investing
Kenkyo Investing

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