Thinking points
- Isamu Paint (TSE: 4624) is a mid-sized paint manufacturer primarily specializing in paints for automotive, architectural, and industrial repair and maintenance applications.
- Key challenges for the company include a downward trend in the auto repair industry, the company’s mainstay customer industry, caused by the advancement of automobile safety technology, which has led to fewer opportunities for customers to use Isamu’s products for repairs.
- Key opportunities include growing demand for environmentally friendly products resulting from the heightened focus on ESG, as well as regulations such as TCFD.
- At JPY3,200 per share, Isamu trades at an adjusted EV/EBIT of -0.2x with a market capitalization of JPY6.4bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +5.6% to +14.9% including shareholder returns, over the next 3-5 years.
Introduction
Isamu Paint is a mid-sized paint manufacturer specializing in paints for automotive, architectural, and industrial repair and maintenance applications. The company runs a single segment operation, which can be categorized into paints for automotive repair, architectural, industrial, and other applications. As the company only recently started disclosing a breakdown of sales, the chart below only contains results for cumulative Q3 FY03/22.
Generally speaking, Isamu procures raw materials from chemical manufacturers or distributors, produces their own products, then sells the end product to manufacturers and servicers, as well as to retailers through distributors. It is worth mentioning that the company is not active in investor relations and disclosure, and only limited financial information is available.
Business & operating environment
Company History
Isamu was founded in Osaka in 1927 by Isamu Kitamura as a seller of industrial chemicals. Later, the company expanded its product line to include coloring materials, inks, pigments, and synthetic resin paints. After WWII, it started to expand its bases in Tokyo, Nagoya, and other urban areas. In 1965, Isamu opened its Shiga Plant, which is its main production facility today. In 1984, the company listed its shares on the Osaka Securities Exchange, which was ultimately merged into Tokyo Stock Exchange (TSE) in 2013, putting the company in the Second Section of the TSE.
Industry and Business Model
The breakdown of the domestic paint market is illustrated as follows, with structures, new automotive, and metal applications accounting for the majority of the market. On the other hand, Isamu Paint specializes in relatively niche paint products such as for automotive maintenance (2.6%) and building materials (5.8%) applications.
According to Astute Analytica, the global market of automobile paint amounted to $17.5bn in 2020, and is estimated to grow to $23.2bn in 2027 with a CAGR of +4.3%. However, this growth will likely be supported by a rebound in new car sales following COVID-19 lockdowns, and an increase in the number of automobiles in developing countries. The domestic market for maintenance paints, which is Isamu Paint’s primary domain, is unlikely to see meaningful growth owing to a decline in the number of vehicles being repaired as a result of advancements in automobile safety technology.
In fact, the number of vehicles owned in Japan has increased slightly at a CAGR of +0.4% over the past decade, but sales for post-accident maintenance have trended downward at a CAGR of -1.4%.
Isamu Paint’s business model is fairly simple. The company purchases raw materials from chemical manufacturers and trading companies, processes these materials into paints, and sells the end-products to manufacturers of building materials or automobiles, servicers such as construction companies and automobile repair shops, or retailers through distributors.
Since 2021, the price of naphtha, the main raw material for paint manufacturers, has risen sharply due to soaring crude oil prices. In 2022, crude oil prices have already surpassed $100/barrel, accelerated by the situation in Ukraine, with Asian naphtha prices recently reaching over $800/ton for the first time since 2014. This is likely to pressure earnings of paint manufacturers in general, including Isamu Paint.
Isamu specializes in paints for maintenance and repairing of vehicles, and for finishing materials for building materials, and thus its performance is highly correlated with business sentiment in the auto repair and construction industries.
Looking at past results, Isamu Paint has delivered sluggish performance since 2014, with -2.0% CAGR in sales, which reflects the market environment mentioned earlier. Meanwhile, operating profit has fallen for four consecutive years, with OPM dropping from 10.6% in FY03/17 to 7.4% in FY03/21. The company is guiding for a slight improvement in FY03/22 by curbing fixed costs. It tends to shy away from investing aggressively even when sales and profits are on the decline, and most of the net cash-flow after tax and dividends have accumulated as cash.
Shareholders
As of the end of Dec 2021, the company had 2,000,000 shares issued, and 93,600 shares in treasury, putting outstanding shares at 1,906,400. Foreign shareholders accounted for approximately 9.2% of total. Major shareholders are as follows.
Hatsumi Kitamura & Ken Kitamura are part of the founding family. Hikari Tsushin (TSE: 9435) is a well known value investor in Japan. Nagase (TSE: 8012), Ishihara (TSE: 4028) and Daicel (TSE: 4202) are the core trading partners of Isamu Paint, and the latter two are headquartered in Osaka together with Isamu.
The company has not issued any stock options so far, and has not executed any share repurchases in recent years. However, the company did cancel 400,000 treasury shares in Dec 2021, which were equivalent to 16.7% of the total shares issued at that time.
Nevertheless, the company has not announced a quantified shareholder return policy, and has paid the same JPY50 per share in dividends over the last three fiscal years. On the other hand, the dividend payout ratio is gradually increasing from 18.5% in FY03/18 to 23.0% in FY03/21, as profits have fallen year by year.
Financials & valuation
- Isamu Paint (TSE: 4624) is a mid-sized paint manufacturer primarily specializing in paints for automotive, architectural, and industrial repair and maintenance applications.
- Key challenges for the company include a downward trend in the auto repair industry, the company’s mainstay customer industry, caused by the advancement of automobile safety technology, which has led to fewer opportunities for customers to use Isamu’s products for repairs.
- Key opportunities include growing demand for environmentally friendly products resulting from the heightened focus on ESG, as well as regulations such as TCFD.
- At JPY3,200 per share, Isamu trades at an adjusted EV/EBIT of -0.2x with a market capitalization of JPY6.4bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +5.6% to +14.9% including shareholder returns, over the next 3-5 years.
With a relatively stable source of revenue, Isamu Paint has been operating completely debt-free since FY03/17 excluding some lease debt, and is extremely cash-rich, with cash and equivalents of JPY7.2bn out of total assets of JPY19.2bn as of December 2021. The company also has JPY3.8bn in cross shareholdings. As a result, it maintains a strong balance sheet with an equity ratio of 80.4%.
Some of the challenges the company faces include a drop in demand for the company’s products resulting from advancements in automobile safety technology. Isamu specializes in paints for automobile repairs, but the number of auto accidents has been declining domestically, which has led to lower sales. In addition, the price of naphtha, a raw material for paint, has soared to $800/ton (Singapore), the highest level since 2014, as crude oil prices rose sharply in response to the situation in Ukraine. If the situation continues or progresses and Isamu is unable to pass the cost increases onto its customers, the company’s earnings performance will be pressured.
In terms of opportunities, the growing demand for environmentally friendly products could be a tailwind for Isamu, which as worked to developed products in this area ahead of its peers From April 2022, all 1,841 companies listed on TSE Prime (1st market) will be required to abide by TCFD (Task Force on Climate-related Financial Disclosures), where ESG-related information such as emissions in their business activities is disclosed. As a result, auto servicers are likely to be motivated to prefer environmentally friendly products that make their own Scope 1 emissions appear lower. In addition, the pent-up demand following the COVID-19 pandemic in the construction industry may boost demand for Isamu’s architectural finishing products.
At JPY3,200 per share, Isamu trades at an adjusted EV/EBIT of -0.2x with a market capitalization of JPY6.4bn. Assuming a fair value EV/EBIT of 2-4x and the pace of sales & EBIT contractions remaining the same, investors can expect an investment CAGR of between +5.6% and +14.9% including shareholder returns, over the next 3 to 5 years. However, it is important to note that there isn’t a clear catalyst that would shift the narrative positively, which may keep share prices depressed for some time.
The bottom line
Isamu Paint is a mid-sized paint manufacturer specializing in paints for automotive, architectural, and industrial repair and maintenance applications. Although the company faces some serious challenges such as the falling demand for its auto-repair paint underpinned by a decline in the number of car accidents, it also has some tailwinds such as the upward trend in eco-friendly products. Buying in at JPY3,200 per share, investors can expect an investment CAGR of between +5.6% and +14.9%, including shareholder returns, over the next 3 to 5 years.
