Thinking Points

  • Sugimoto Shoji (TSE: 9932) is a trading company focused on face-to-face sales and customized solutions specializing in measuring tools, machine tools, and other manufacturing related equipment.
  • The competitive environment for trading companies targeting manufacturers is intensifying, as transactions increasingly move online, especially for general purpose products, but Sugimoto remains primarily focused on face-to-face custom solution sales.
  • While the company is likely to continue delivering stable performance under a healthy capital investment environment, it may be more susceptible to cyclical swings as the competitive environment for general purpose products faces increasing competition.
  • At JPY1,897 per share, Sugimoto Shoji trades at an EV/EBIT of 3.6x with a market capitalization of JPY19.9bn (USD189mn). 

Introduction

Sugimoto Shoji (TSE: 9932) is a 100 year old trading company primarily specializing in measuring tools and machine tools while also handling other manufacturing related equipment. The company reports sales under five categories: Measuring Tools, Tool Equipment, Machine Tools, Pneumatic and Hydraulic Equipment, and Other.

Source: Kenkyo Investing, based on company data

In terms of how Sugimoto Shoji operates, there is a certain level of mystery surrounding the company as it often does not make its earnings presentation available on its website, and its position as a mid-tier specialized trading company means little to no media coverage. With that said, its current medium-term management plan (FY03/19–FY03/21) shows a growth strategy focused on a more traditional locally-oriented approach of face-to-face sales and proposals.

The business & environment

Sugimoto Shoji specialized in measuring tools and machine tools from when it was first established in 1921.  The company sits in between equipment vendors and manufacturers, combining products from various vendors to develop a solution for its client manufacturers while also communicating the demands from the production floor to equipment vendors.

Its business gradually expanded to include peripheral products, which led to the establishment of the Pneumatic and Hydraulic and the Tool Equipment categories. With 45 offices spread out across Japan today, Sugimoto Shoji is a well established mid-tier trading company.

Source: Kenkyo Investing, based on company data

With a focus on measuring tools and machine tools, Sugimoto Shoji mainly caters to the manufacturing sector. As such, and as seen in the chart above, the company is susceptible to cyclical swings. 

A quick look at results over the last 10 years makes it seem like Sugimoto Shoji has been on a steady growth trajectory, however, it was not until FY03/17 that the company recovered to pre-crash level performance.

Source: Kenkyo Investing, based on company data

Recovery in operating profit took a little longer than for revenue. In its annual filings, Sugimoto Shoji notes several risk factors such as its exposure to the manufacturing industry, securing and training personnel, and natural disasters. 

The most interesting point in the section on risk factors is the change in sales channels. The company noted that competition from IT and logistics equipped companies is intensifying, especially for general purpose products (i.e., not custom made), with internet sales on the rise. After noting this, Sugimoto Shoji proceeds to explain that, while it plans to develop online sales, its principle focus will remain on face-to-face solution-oriented sales. 

Although the company does not disclose sales mix deeper than the category level, the lesser focus on online sales may lead to a shift in sales mix at the subcategory level. For example, Sugimoto Shoji non-specifically notes that it sells consumables used in manufacturing facilities. In some cases, its customers may benefit from implementing solutions proposed by Sugimoto Shoji, but purchasing consumables (which are often general purpose products and raw materials) through online platforms operated by Sugimoto’s competitors.

Without knowing the actual sales mix at the subcategory level, it’s difficult to produce reasonable estimates on how its face-to-face solution-oriented focus would affect results. At the same time, it is fair to say that Sugimoto Shoji’s sales will likely directionally lean more on client capex budgets versus opex when compared to pre-crash levels. In other words, the company may be more susceptible to cyclical swings going forward.

One thing worth noting here is that virtually all specialized trading companies catering to the manufacturing sector piece together products from different vendors to provide solutions, often citing this as a strength. It’s difficult to grasp the quality of solutions offered or the strength of company-client relationships for each trading company without ground level contacts. 

For FY03/21, Sugimoto Shoji initially withheld forecasts, but announced one just before end-Q2 (September 30, 2020). The forecast calls for sales of JPY39.6bn (USD375.7mn, -9.8% YoY), operating profit of JPY1.9bn (USD17.6mn, -26.8% YoY), recurring profit of JPY2.2bn (USD20.7mn, -25.6% YoY), and net income of JPY1.4bn (USD13.7mn, -24.0% YoY).

As a reference, the company reported Q1 sales of JPY9.1bn (USD86.4mn, -14.3% YoY), operating profit of JPY343mn (USD3.3mn, -21.4% YoY), recurring profit of JPY423mn (USD4.0mn, -19.5% YoY), and net income of JPY283mn (USD2.7mn, -14.5% YoY).

Shareholders

As of end-Q1 (June 30, 2020), Sugimoto Shoji had 11,399,237 shares issued and 842,077 shares in treasury, with outstanding shares at 10,557,160.

Here is a list of major shareholders:

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

The Sugimoto family collectively owns 11.3% of outstanding shares. Although the company’s current level of disclosure leaves much to be desired (i.e., lack of earnings presentations on website), some credit is due for recent sizable share repurchases.

Sugimoto Shoji moved forward with its largest repurchase program in recent times in FY03/20, acquiring 500,000 shares (4.34% of outstanding shares in FY03/19) for a price of JPY1,017mn (USD9.7mn), or JPY2,033 per share. Prior to this, the company repurchased shares on a much smaller scale in FY03/16, FY03/13, and FY03/12.

In terms of dividends, the company has historically maintained a dividend payout ratio of around 30%, with FY03/20 being an exception at 45.2%. 

Financials & Valuation

  • Sugimoto Shoji (TSE: 9932) is a trading company focused on face-to-face sales and customized solutions specializing in measuring tools, machine tools, and other manufacturing related equipment.
  • The competitive environment for trading companies targeting manufacturers is intensifying, as transactions increasingly move online, especially for general purpose products, but Sugimoto remains primarily focused on face-to-face custom solution sales.
  • While the company is likely to continue delivering stable performance under a healthy capital investment environment, it may be more susceptible to cyclical swings as the competitive environment for general purpose products faces increasing competition.
  • At JPY1,897 per share, Sugimoto Shoji trades at an EV/EBIT of 3.6x with a market capitalization of JPY19.9bn (USD189mn). 

Sugimoto Shoji is a mid-tier trading company primarily focused on serving clients in the manufacturing sector. With little publicly available information and a fairly consistent history of performance in line with the capital investment environment, the company appears to be the definition of a medium quality operating business. 

With that said, it is worth noting that Sugimoto Shoji maintains a strong balance sheet with an equity-to-asset ratio of 0.88. The company has also remained free cash flow positive even during the 2008-2010 global financial crisis.

Overall, Sugimoto Shoji’s operating business is about as medium-quality as it gets, but with a strong financial base. While the company may suspend any plans for share repurchases in the near-term in light of the coronavirus pandemic, the major share repurchase program carried out in FY03/20 may be an indicator of what is to come under a more normal post-corona investment environment.

At JPY1,897 per share, Sugimoto Shoji trades at an EV/EBIT of 4.7x (TTM) with a market capitalization of JPY19.9bn (USD189mn). Adjusted for long-term investment security holdings, the company trades at 3.6x EV/EBIT.

Given Sugimoto Shoji’s scale and business quality, an EV/EBIT range of between 3 and 6 on an adjusted basis is roughly appropriate. Although with some fluctuations, the company has traded roughly where it currently is over the last several years. A sudden improvement in business performance amid the coronavirus pandemic appears unlikely, especially considering that the company is forecasting full-year operating profits to be 26.8% YoY. Additionally, the company traded at roughly current levels just prior to the 2008 global financial crisis.

While the current dividend yield of 3.2% may seem attractive, it’s worth noting that the operating business is subject to cyclical swings in which the company may suspend dividends. Investors ought to revisit the company should the stock price  pullback to the JPY1,200 level.

The bottom line

Sugimoto Shoji is a respectable specialized trading company serving clients in the manufacturing sector. Over its 100 year history, the company has built an operating business with a strong focus on traditional face-to-face sales, and a strong financial base that would comfortably pull it through a prolonged crash. At JPY1,897 per share, however, investors are best advised to revisit the company should share prices pullback to the JPY1,200 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.