Thinking points
- Komatsu Wall Industry (TSE: 7949) is a partition manufacturer primarily specializing in partitions for offices, factories, and event spaces, and holds the largest market share in Japan.
- Key challenges for the company include soaring raw material prices, supply concerns triggered by economic sanctions on Russia, and higher import prices caused by the weakening yen.
- Key opportunities include the company’s strong market share of 25% in a niche market and an opportunity for consistent high demand for partitions to prevent COVID-19 infections.
- At JPY1,850 per share, Komatsu Wall trades at an adjusted EV/EBIT of 2.3x with a market capitalization of JPY20bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +0.5% to +15.0% including shareholder returns, over the next 3-5 years.
Introduction
Komatsu Wall Industry is a partition manufacturer specializing in movable, fixed, and mobile partitions as well as toilet booths for offices, factories, and hotels. The company commands a leading 25% market share for partitions in Japan. While it operates only one segment, its revenues can be classified by product as follows:
- Movable partitions that can be removed or relocated depending on usage when changing layouts;
- Fixed partitions that are welded to the building frame;
- Mobile partitions that can be moved by the user at the event venue such as in hotels or convention centers; and
- Toilet booths that divide toilet units.
Business & operating environment
Company History
Komatsu Wall was founded by Minoru Kano in 1968 in Komatsu, Ishikawa prefecture, as a manufacturer of steel and aluminum partitions. The company developed and began selling movable partitions in 1971, then proceeded to develop and sell mobile partitions in 1981. Movable partitions and mobile partitions have since become Komatsu Wall’s core products. As Japan’s economic growth led to an increase in event venues and office space, the company expanded its footprint throughout Japan, and in 1999 it listed on the Tokyo Stock Exchange and Osaka Securities Exchange, which are now merged. Yutaka Kano, son of founder Minoru Kano, has led the company since 1992. Although Komatsu Wall entered the Taiwan market in 1986, the company eventually withdrew from the international market in 1995 and has since operated only in Japan.
Industry and Business Model
According to the Japan Movable Partition Association, approximately 30 companies are operating in the Japanese partition market, where the top 10 companies accounted for more over 90% of the market. Komatsu Wall and Comany (TSE: 7945) hold formidable positions with around 50% market share combined. In FY03/19, Komatsu Wall overtook Comany in sales in FY03/19 and has since been the industry leader with about a 25% market share.
The partition market had grown at a CAGR of +3.0% from FY03/15 to FY03/20, aiding in Komatsu Wall’s top-line +4.4% CAGR, but was subsequently confronted with a sudden drop in demand under COVID-19. Both Komatsu Wall and Comany expect revenue to recover by around +5% in FY03/22 on the back of society adapting to living with COVID-19, and the whole industry is also expected to recover gradually.
On the other hand, there are growing concerns about raw material prices in the wake of Russia’s invasion into Ukraine. The main raw materials for partitions are fabricated aluminum products, but due to concerns over the supply of aluminum ingots, the three-month aluminum futures price on the London Metal Exchange is at a record high of USD3,400 per tonne, nearly double the level of a year ago. Nickel prices have similarly doubled to USD34,000 per tonne YoY. In addition, due to differences in monetary policy between Japan and the US, the dollar-yen has depreciated +10% from JPY110/USD1 in March 2021 to JPY122/USD1 in March 2022. Japanese manufacturers such as Komatsu Wall, which rely on imports for raw materials, will be directly affected by soaring import prices.
Under the market environment described above, the company has steadily expanded its business from just after the global financial crisis up until FY03/20, with sales dropping in FY03/21 due to the COVID-19 pandemic. Although the pandemic has caused delays in office development and renovation, the company expects a rebound in FY03/22.
In terms of sales by product, there has been little change in sales of fixed partitions over the 10 years leading up to 2020, while sales of mobile partitions and movable partitions grew at a CAGR of +7% in the same period. This can be attributed to an incremental need for flexible layout changes in conjunction with the introduction of free address workspaces and the increasing number of workshops held in the domestic working environment.
As for operating profit, Komatsu Wall posted an operating loss in FY03/11 due to the drop in domestic capital investment demand after the global financial crisis, but has since been working to reduce its fixed costs and has achieved an operating profit margin of over 7% for the last nine years.
For FY03/22, the company expects a 10% increase in operating profit on the back of higher sales, but as mentioned above, a decrease in profit is inevitable in FY03/23 due to higher raw material prices.
Shareholders
As of the end of Dec 2021, the company had 10,903,240 shares issued, with 1,623,889 shares in treasury, putting outstanding shares at 9,279,351. Foreign shareholders accounted for approximately 6.9% of total. Major shareholders are as follows.
The largest shareholder, Kanou Aneshisu, is the founding family’s asset management company. Both Hokkoku Bank and Hokuriku Bank are local merchant banks based in the same region as Komatsu Wall.
The company has not issued any stock options so far, and has not executed any share repurchases in recent years. While the company has not announced a shareholder return policy with numerical targets, it has paid out about 30-40% of net income and 45-55% of EBIT for the four years through FY03/20. This payout ratio surged in FY03/21 because of the decline in business results.
Financials & valuation
- Komatsu Wall Industry (TSE: 7949) is a partition manufacturer primarily specializing in partitions for offices, factories, and event spaces, and holds the largest market share in Japan.
- Key challenges for the company include soaring raw material prices, supply concerns triggered by economic sanctions on Russia, and higher import prices caused by the weakening yen.
- Key opportunities include the company’s strong market share of 25% in a niche market and an opportunity for consistent high demand for partitions to prevent COVID-19 infections.
- At JPY1,850 per share, Komatsu Wall trades at an adjusted EV/EBIT of 2.3x with a market capitalization of JPY20bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +0.5% to +15.0% including shareholder returns, over the next 3-5 years.
With a relatively stable source of revenue, Komatsu has been operating completely debt-free for over a decade, and is extremely cash-rich, with cash and equivalents of JPY14.9bn out of total assets of JPY40.8bn as of December 2021. As a result, it maintains a strong balance sheet with an equity ratio of 85.3%.
Some of the challenges the company faces include soaring raw material prices and declining demand for partitions due to the development of robotic process automation (RPA). As mentioned above, the prices of aluminum and nickel, the main raw materials for partitions, are at historically high levels due to the rising production costs along with soaring energy prices such as natural gas and crude oil triggered by the Ukraine crisis, as well as the concerns over the supply of Russian-made metals due to economic sanctions. In addition, Japanese manufacturers, which must rely on imports for raw materials, are substantially affected by the exchange rate as the yen has depreciated 10% over the past year. If the company fails to reflect this increase in material prices on product prices, it may risk losing market share to price competitive foreign players.
In terms of opportunities, Komatsu Wall may benefit from its leading 25% market share in a niche market combined with the potentially consistent high demand for partitions to prevent infections in post-COVID Japan. Although the company was not able to take advantage of the special demand for remote-work partitions during the pandemic (e.g. background for ZOOM meeting, boundaries in the home) as it does not target the home partitioning market, it still has opportunities to capture infection prevention partition demand as more people start returning to the office.
At JPY1,850 per share, Komatsu Wall trades at an adjusted EV/EBIT of 2.3x with a market capitalization of JPY20bn. 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 +0.5% and +15.0% 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
Komatsu Wall Industry is a partition manufacturer specializing in movable, fixed, and mobile partitions as well as toilet booths for offices, factories, and hotels. Although the company faces some serious challenges such as the soaring prices of raw material (Aluminum) or a drop in its demand due to progress in RPA, it also has some tailwinds such as higher demand for COVID-19 measures in offices. Buying in at JPY1,850 per share, investors can expect an investment CAGR of between +0.5% and +15.0%, including shareholder returns, over the next 3 to 5 years.
