Thinking points

  • Hisaka Works (TSE1: 6247) is an industrial machinery manufacturer that focuses on heat exchangers and process engineering (PE), and commands a leading domestic market share in the field of plate heat exchangers and niche industrial equipment.
  • Although the company has managed to secure profits at the operating level, OPM has been stagnant, and effective allocation of excess cash, which accounts for about 20% of total assets, is a key challenge.
  • With business trends such as the shift toward a sustainable society and domestic production of COVID-19 vaccines, there is a good possibility that the company can expand both its Heat Exchanger and Process Engineering businesses.
  • At JPY850 per share, Hisaka Works trades at 76.3% P/NCAV and a negative enterprise value with a market capitalization of JPY27.8bn.
  • Assuming a fair value EV/EBIT multiple of between 2 to 4x, investors can expect an investment CAGR of between 4.6% and 11.5%, including shareholder returns, over the next 3 to 5 years.

Introduction

Hisaka Works (TSE1: 6247) is an industrial machinery manufacturer with the largest domestic market share in plate heat exchangers and infusion sterilizers. Its customers range from manufacturers of clothing, food, and household goods to pharmaceuticals and automobiles. The company reports through four segments: Heat Exchanger, Process Engineering, Valve, and Other.

Source: Kenkyo Investing, based on company data

Although the company was substantially impacted by the COVID-19 pandemic, it maintains a strong and highly liquid financial position along with upcoming opportunities which include emerging business trends such as the shift toward a sustainable society and the push for domestic production of COVID-19 vaccines.

Business and operating environment

Hisaka Works was established in 1942 in Osaka and started out by focusing on the manufacture and sale of stainless steel products. In the 1950s, the company developed dyeing machines, plate heat exchangers, and ball valves, which would later become its mainstay products. In the 1960s, the company benefited from Japan’s postwar economic recovery and expanded its business, subsequently listing its shares on the second section of the Osaka Securities Exchange in 1970. Following the collapse of Japan’s asset price bubble, amid falling demand from the textile industry, the company focused on heat exchangers and sterilizers and managed to maintain steady revenues even during the ensuing recession.

With the establishment of a local subsidiary in Malaysia in 2004, the company has since expanded into Southeast Asia as well as China and Korea. Today, overseas revenues account for about 20% of total revenue. Hisaka expanded its technology and business domain in the PE business by acquiring MicroZero in 2009, Asahi Industry in 2016, and Komatsugawa Chemical Engineering in 2019. In addition to its existing two locations in Tokyo and Osaka, the company expanded its sales network in Nagoya and Kyushu.

In 2020, the company announced its medium-term management plan, which calls for revenues of JPY50bn and operating profit of JPY5bn in FY03/30, as well as revenues of JPY100bn in FY03/43, its 100th anniversary. The company is also focusing on strengthening CSR and corporate governance by setting its SDG Vision and shifting to a company with an audit committee (from FY03/22).

Today, Hisaka Works is an industrial machinery manufacturer focused on heat exchangers and process engineering (PE). With its stainless steel processing technology and heat and pressure control technology, the company commands the top domestic market share in niche industrial equipment fields such as plate heat exchangers, food and liquid sterilizers, and infusion sterilizers, carrying a wide range of customers in manufacturing industries such as food, clothing, household goods, automobiles, shipbuilding, pharmaceuticals, environment, and energy.

Hisaka Works consists of four reporting segments: Heat Exchanger, Process Engineering, Valve, and Other.

Source: Kenkyo Investing, based on company data

A heat exchanger is a device that heats or cools an object by exchanging heat between two fluids. Its use ranges from familiar items such as household air conditioners, radiators for cars and ships, and boilers, to large items with industrial applications. Hisaka commands a 85% domestic share in brazed plate heat exchangers and 60% share in plate heat exchangers, making it a pioneer in Japan and one of the largest manufacturers globally.

The Process Engineering (PE) business provides a series of production processes from product technology development to raw material selection, design, and manufacturing. The company’s strength lies in the development and sales of sterilizers for the food and beverage industry, dyeing machines for the textile industry, and pharmaceutical sterilizers.

While the Heat Exchanger business used to be the largest segment in terms of revenue, the PE business has become the largest revenue contributor since FY03/19. However, operating profit is still driven by the Heat Exchanger business. The company expects revenue and profits for both segments to fall in FY03/21 owing to lower demand caused by the COVID-19 pandemic as well as a reactionary decline from large orders in the PE business booked in FY03/20.

The global market for heat exchangers (2019) is expected to be worth USD15.3bn, with plate heat exchangers, Hisaka’s mainstay, accounting for just over USD1bn. The market is expected to grow at a 6% CAGR through 2024 on the back of rising global demand. Under this backdrop, Hisaka positions itself as a solution-oriented business and has successfully boosted revenues and retained customers through maintenance services on top of product sales.

The Process Engineering business has a concentrated customer base as it specializes in the food and beverage, pharmaceutical, and textile (dyeing) industries. Since FY03/19, the segment has outgrown the Heat Exchanger business and became the company’s largest segment. Notably, Hisaka acquired Komatsugawa Chemical Engineering in 2019, which possesses machinery and engineering technologies related to biopharmaceutical manufacturing. Hisaka plans to leverage these technologies to strengthen its business development in the biopharmaceutical equipment market, which is expected to grow globally.

In FY03/10, in the downturn following the global financial crisis, the company posted substantial declines in revenue and profits due to stalled equipment replacement demand as well as declining sales prices and volumes caused by intensified competition. Subsequently, orders gradually recovered as the global economy recovered, especially in Asian and emerging markets, and revenue grew at a 5% CAGR for nine years through FY03/20.

Source: Kenkyo Investing, based on company data

OPM has been stable around 5 to 7% over the past five years. Compared to an OPM of 7~9% for the Heat Exchanger business, the Process Engineering business lags behind with an OPM of 3~6%, but this has gradually improved through FY03/20. 

In FY03/21, both orders and revenue declined sharply as customers postponed or scaled back capital investments amid a slowdown in the economy brought on by the COVID-19 pandemic. While the company expects to secure profits at the operating level, it expects OPM to fall to 4.6%.

Shareholders

As of end-Q3 FY03/21 (December 31, 2020), the company had 32,732,800 shares issued and 4,628,500 shares in treasury, putting outstanding shares at 28,104,300. As of end-1H FY03/21 (September 30, 2020), foreign corporations accounted for 18.92% of shares held. Major shareholders are below.

Source: Kenkyo Investing, based on company data

There have been no major changes in the composition of major shareholders. Nippon Steel Stainless Steel Corporation is likely a key supplier. Inaba Denki (9934), also based in Osaka, is a specialized trading company and an important trading partner in the Heat Exchanger and PE businesses. Prior to 2017, Inaba Denki had a 2.78% stake in Hisaka Works, but increased its stake in 2018 and 2019, while Hisaka Works also holds a 1.13% stake in Inaba Denki. Takuma (6013) is a Hyogo-based company engaged in the design and construction of various boilers as well as waste processing, water treatment, and other plants, and is also a trading partner in the Heat Exchanger business.

With regard to dividends, the company’s policy is to maintain a consolidated dividend on equity (DOE) ratio of at least 1.5%. The company had paid out dividends of JPY20 per share from FY03/18 to FY03/20, but has announced that it will raise dividends to JPY30 per share in FY03/21. As a side note, based on net assets of JPY50.8bn at end-FY03/20, a JPY20 per share dividend would fall short of the company’s 1.5% DOE policy, which equates to JPY23 per share. On another note, while the company’s dividend payout ratio has been around 30-40% in the past, it expects profits to drop substantially in FY03/21, which, combined with the hike in dividends, is expected to significantly increase the payout ratio to 83.5%. 

In May 2019, the company announced a share buyback, increasing its treasury share count from 2.8mn shares (8.8%) to 4.6mn shares (14.1%) during FY03/20. There are no stock options outstanding.

Financials and valuation

  • Hisaka Works is an industrial machinery manufacturer that focuses on heat exchangers and process engineering (PE), and commands a leading domestic market share in the field of plate heat exchangers and niche industrial equipment.
  • Although the company has managed to secure profits at the operating level, OPM has been stagnant, and effective allocation of excess cash, which accounts for about 20% of total assets, is a key challenge.
  • With business trends such as the shift toward a sustainable society and domestic production of COVID-19 vaccines, there is a good possibility that the company can expand both its Heat Exchanger and Process Engineering businesses.
  • At JPY850 per share, Hisaka Works trades at 76.3% P/NCAV and a negative enterprise value with a market capitalization of JPY27.8bn.
  • Assuming a fair value EV/EBIT multiple of between 2 to 4x, investors can expect an investment CAGR of between 4.6% and 11.5%, including shareholder returns, over the next 3 to 5 years.

Hisaka Works is a manufacturer of industrial machinery specializing in stainless steel processing technology and heat and pressure control technology, and is a leading player in Japan in the fields of plate heat exchangers, sterilizers for food and pharmaceuticals, and liquid dyeing machines for the textile industry.

Some of the challenges Hisaka Works faces include falling demand due to a shrinking Japanese economy, which accounts for 80% of total sales, as well as intensifying competition due to technological advances by competitors in Asia and elsewhere, and the obsolescence of Hisaka’s technology. From an earnings perspective, the company needs to restore revenues and improve its stagnant margins following the pandemic, while from a balance sheet perspective, it needs to efficiently allocate its overabundance of capital (as discussed below).

As for opportunities, with growing interest in a sustainable society, Hisaka’s heat exchanger technology may be applied and used in renewable energy power plants, such as geothermal and biomass plants, as well as in carbon capture and storage facilities. In the Process Engineering business, the technologies of Hisaka Works and subsidiary Komatsugawa Chemical Engineering can be used to aid in efforts to produce COVID-19 vaccines domestically as well as in pharmaceutical companies as they shift their main development targets toward biopharmaceuticals and other polymer-based drugs. In addition, with its solid financial footing and ample cash reserves as shown below, the company can boost revenues and profits through M&A and capital investments.

Consolidated Balance Sheet (end-Q3 FY03/21, JPY mn)

Source: Kenkyo Investing, based on company data

Of the JPY63.2bn in total assets, the company is cash-rich with JPY13.9bn in cash and equivalents and an extremely high current ratio of 370%. Most of the JPY13bn in investment securities are cross-shareholdings in trading partners. On the liability side, the company has no debt, with an equity-to-asset ratio of 82.8%.

As of end-March 2021, Hisaka shares traded around JPY850 with a market capitalization of about JPY27.8bn. In contrast, the company’s net current assets were at JPY20.2bn. Adjusting in long-term investment securities, this figure climbs to JPY33.2bn, giving Hisaka a P/NCAV valuation of 76.3%. Additionally, on an adjusted basis, the company trades at negative EV. 

Assuming a fair value EV/EBIT multiple of between 2 to 4x and applying an EBIT value between JPY1.3bn (FY03/21 operating profit forecast) and JPY1.7bn (TTM operating profit as of Q3 FY03/21), investors can expect an investment CAGR of between 4.6% and 11.5%, including shareholder returns, over the next 3 to 5 years.

The bottom line

Hisaka Works is a leading industrial machinery manufacturer that focuses on heat exchangers and process engineering. While the company was severely impacted by the COVID-19 pandemic, it maintains a more-than-healthy balance sheet and is in a good position to take advantage of up and coming business trends such as the shift toward a sustainable society and domestic production of COVID-19 vaccines. Buying in at JPY850 per share, investors can expect an investment CAGR of between 4.6% and 11.5%, including shareholder returns, over the next 3 to 5 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.