Yotai Refractories Co., Ltd.

Yotai (‘company’) primarily manufactures refractories, which is an indispensable basic material in the steel, chemical, cement, glass, and other high heat industries.

The company operates two segments: a) manufacturing of refractories (85-90% of sales based out of four factories in Japan), and b) engineering, which is the design and construction of kilns that meet the demand of refractory customers (based out of one subsidiary in China).

The company’s primary customer is the steel industry, which has been sluggish lately. This adversity was exacerbated by pandemic-related restrictions. Further, there were large increases in the price of raw materials sourced from China. Moreover, competition in the industry is fierce and intensifying.

It reported TTM sales (to September 2020) of 24.1b yen (FY 2019: 27.9b), ebitda of 4b yen (2019: 5.9b yen), and net profits of 2.2b yen (2019: 3.6b yen). Recent free cash flows were good at 5bn yen.

The financial position is strong with net cash of 9.6b yen and very strong current and liquid asset ratios. Adding in investment securities of 1.7b yen at market value (mostly Japanese stocks), the net current asset value is 22.3b yen.

The stock is selling for 18.5b yen – a 17% discount to the above minimum liquidation value, and 8.4x depressed ttm earnings or 5.1x 2019 earnings.

Dividend payouts are meagre with ttm dividends at 352m yen – a laughable 3.7% of the cash balance. There were repurchases in the last year of 130m yen – but the total shareholder yield amounts to a measly 2.6% at market.

Even after accounting for the planned capital expenditure of 500m yen on two more factories in Japan, the cash balance is clearly excessive and management ought to pay out more to shareholders. However, 10%+ returns on tangible assets promises some comfort to minority shareholders in case of further related capital expenditures.

Though the outlook is bleak, the company operates in a basic industry, and is likely to continue earning over the long future pretty much as before. Prospective investors aren’t taking much of a risk buying stock at the current price, which appears to provide an adequate safety margin to absorb future shocks.