Thinking points

  • Toba (TSE: 7472) is a trading company specializing in control and factory automation (FA) equipment, mainly for semiconductor, automobile, and FA/precision industries. 
  • Key challenges include the rise of the B2B direct sales model, which threatens the trading company business model, as well as a growing need to expand solution businesses like consulting to retain clients. 
  • Key opportunities include high demand for semiconductor and related manufacturing equipment, which is one of Toba’s specialties, as well as the growing RPA trend in Japan as well as other Asian countries where Toba has a presence. 
  • At JPY2,500 per share, Toba trades at an adjusted P/NCAV of 91% with a market capitalization of JPY11bn.
  • Assuming a fair value P/NCAV of 80-120%, investors can expect an investment CAGR of +1.7% to +10.1%, including shareholder returns over the next 5-8 years.

Introduction

Toba Inc. (TSE: 7472) is a machinery trading company that purchases control machinery, FA equipment, and industrial equipment from ~1,200 different suppliers and selling them to manufacturing sites across Japan and other Asian countries. The company runs a single segment operation, but the chart below shows sales by product category:

Source: Kenkyo Investing, based on company data

Business & operating environment

Company History

Toba was founded in 1906 in Dalian, China, and has been engaged in the production and sales of machinery and tools, rubber products, steel and other products for the railroad, mining, shipbuilding, machinery, and other industrial sectors. After temporarily halting all business operations during World War II, the company restarted its trading business in Tokyo, expanding its product portfolio and sales channels and riding the wave of growth in the Japanese manufacturing industry. The company went public in 2004, and now operates in Japan, China, Thailand, and Vietnam.

Industry and Business Model

As Toba is engaged in wholesaling to manufacturers, its business performance is deeply tied to its clients’ capital investment. Following the global financial crisis in 2008, its revenue halved in two years as capital investment plummeted. In the late 2010’s, on the other hand, Toba benefited from high demand in semiconductors and LCD as well as manufacturing equipment. More recently, the COVID-19 pandemic had an impact on Toba’s top-line in FY03/20 and FY03/21, but it expects revenue to recover from FY03/22 onward.

Source: Kenkyo Investing, based on company data

It is also worth mentioning that the company’s operating margins have been relatively stable, ranging between 4.4% to 6.5% over the last 10 years despite some volatility in revenue. Toba managed to generate operating profit even during the global financial crisis, thanks to its ability to operate without major business risk as a wholesaler by reducing inventory during recessionary periods.  

Source: Kenkyo Investing, based on company data

According to projections by the Semiconductor Equipment Association of Japan, sales of semiconductor manufacturing equipment, which is Toba’s main focus, is forecasted to grow at a 14.7% CAGR through 2023, with FPD manufacturing equipment growing at a 2.5% CAGR.

Sales ProjectionFY03/20FY03/21FY03/22FY03/23CAGR
Semiconductor manufacturing equipment2,3843,2633,4303,59814.7%
FPD manufacturing equipment4644704805002.5%

Source: Kenkyo Investing, based on  Semiconductor Equipment Association of Japan

Source: Kenkyo Investing, based on company data

Shareholders

As of end-September 2021, the company had 5,000,000 shares issued and 661,000 shares in treasury, putting outstanding shares at 4,339,000.  More recently, the company repurchased an additional 70,000 shares (1.61% of the outstanding) in November 2021.

Source: Kenkyo Investing, based on company data

Both Shigeyuki and Toshiko Toba are members of the founding family.  Toba Kousan appears to be the asset management vehicle of the family.

Mizuho Bank is one of the largest merchant and investment banks in Japan. Ichigo Trust is a Japanese asset manager operating REITs and renewables infrastructure vehicles. SMC (TSE: 6273) and Chiyoda Integre (TSE: 6915) are Japanese industrial machinery and parts manufacturers, and some of Toba’s largest suppliers. Details of Ritsuko Fujimori are unknown.

There are no existing stock acquisition rights. Toba sets its target dividend payout ratio at a minimum of 35%, and has generated shareholder returns of around 40-50% over the last 5 years.

Financials & valuation

  • Toba (TSE: 7472) is a trading company specializing in control and factory automation (FA) equipment, mainly for semiconductor, automobile, and FA/precision industries. 
  • Key challenges include the rise of the B2B direct sales model, which threatens the trading company business model, as well as a growing need to expand solution businesses like consulting to retain clients. 
  • Key opportunities include high demand for semiconductor and related manufacturing equipment, which is one of Toba’s specialties, as well as the growing RPA trend in Japan as well as other Asian countries where Toba has a presence. 
  • At JPY2,500 per share, Toba trades at an adjusted P/NCAV of 91% with a market capitalization of JPY11bn.
  • Assuming a fair value P/NCAV of 80-120%, investors can expect an investment CAGR of +1.7% to +10.1%, including shareholder returns over the next 5-8 years.

Toba Inc. is a trading company specializing in control machinery, FA equipment, and tools for manufacturing companies such as semiconductor manufacturers. Although its revenue has fluctuated owing to its high dependence on capital investment demand, Toba has managed to maintain stable profitability. As a result, it has been operating debt-free and is extremely cash-rich, with cash and deposits of JPY9.6 billion out of total assets of JPY27.2 billion.

The key challenge that Toba faces is a shift of its business model. Originally, trading companies like Toba captured easy margins by purchasing goods at low prices and selling them at higher prices. Clients benefited from its trading functions, for example by being able to compare multiple suppliers, purchase in small lots, and enjoy flexible delivery. However, the B2B manufacturer direct sales model has been on the rise in recent years with the development of information technology and logistics services, which threatens the very existence of the traditional trading company. As such, Toba is under pressure to retain clients by finding other ways to provide value, such as developing solution-oriented businesses like consulting, or insourcing logistics functions.  

In terms of opportunities, the global chip shortage has stimulated demand for manufacturing equipment, one of Toba’s focal areas, which is likely to help boost Toba’s earnings. At the same time, the company has enjoyed the RPA trend for FA equipment in recent years as well.

At JPY2,500 per share, Toba trades at an adjusted P/NCAV of 91% with a market capitalization of JPY11bn. Its adjusted P/E ratio is low at 8.8x with a P/B ratio of 0.6x. Assuming that the bottom line remains relatively stable with a fair value P/NCAV of 80-120%, investors can expect an investment CAGR of +1.7% to +10.1% over the next 5-8 years.

The bottom line

Toba Inc. is a trading company specializing in control machinery, FA equipment, and industrial equipment. Although the company faces some challenges such as the rise of direct sales models driven by developments in IT and logistics, it also has tailwinds such as higher demand in semiconductor and manufacturing equipment. Buying in at JPY2,500 per share, investors can expect an investment CAGR of between +1.7% and +10.1%, including 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.