Techno Ryowa Co. Ltd

Techno Ryowa (‘company’) is engaged in the design and manufacture of construction equipment using air conditioning and sanitation equipment technology.

It generates practically all of its sales within Japan from industrial equipment construction (58% of 2019 sales), general building equipment construction (39%), and electrical equipment construction (3%). The private sector contributes over 80% of its revenues with the balance coming from government work.

The pandemic adversely affected capital investment demand from the private sector and sales efforts were badly hampered. Orders dropped 28% over the year, and sales declined 18%. Further, 78% of its business is generated via competitive bidding and the balance via “special mission” projects.

The company reported TTM revenues (to September 2020) of 55.7b yen down from the 2019 high of 67.4b yen. TTM ebitda and net profits were 3.3b yen and 2.1b yen - down from 4.8b yen and 3b yen respectively in 2019. Average earnings were 2.6b yen/year.

The value appears to lie in the balance sheet with substantial net cash of 19b yen and net current assets of over 20b yen.

Stopping at the net current asset value would miss the valuable assets under non-current assets.

The company has 9.1b yen in investment securities (35 listed stocks valued at market). In addition, it has an overfunded pension scheme worth 2.9b yen (9.1b in assets minus 6.2b of obligations). These were allocated about 40% to stocks and 60% to bonds and cash. The discount rate of 0.7% doesn’t appear unreasonable and matched the company’s own borrowing rate.

Adding the above to the net current asset value totals 32.6b yen.

The stock currently sells for 19.6b yen (900 yen/share), which is a 40% discount to minimum realizable asset value, and 7-8x average earnings.

Payouts are reasonable with TTM dividends of 752m yen yielding almost 4% at market. The company also bought back stock last month at 901 yen/share.

The Japanese construction industry is expected to remain sluggish - with weak demand pre-dating the pandemic after the construction boom of the Olympics subsided. Nevertheless, the company is still generating orders and plans to focus on equipment for the pharmaceutical, food, and electronic device industries.

Regardless of prospects, the market appears to have gone clearly astray by valuing the company at a 40% discount to minimum asset value – without counting the core equipment construction business. This represents good value for money at the current price.