Fukuvi Chemical Industry Co. Ltd.

Fukuvi Chemical (‘company’) manufactures and sells housing materials (65-75% of revenues) and industrial materials (25-35%) – primarily made of general-purpose plastic resins.

The company’s housing materials are used in exterior, interior, and flooring applications. The industrial materials are used in manufacturing home appliances, vehicle parts, precision products, furniture parts, etc.

More than 90% of current sales are generated in Japan but the company has subsidiaries in the USA, Thailand, and Vietnam - which account for 12% of tangible assets.

The company’s fortunes are tied to housing starts, and construction floor area in Japan – both of which have been declining for the last few years primarily due to Japan’s shrinking population; and exacerbated by other factors such as the consumption tax hike in 2019, stricter lending criteria, and the pandemic. It is also subject to labor shortages.

The company reported TTM sales (to September 2020) of 37.5b yen (FY20: 41.3b), ebitda of 2.2b yen (FY20: 2.6b), and net profits of 739m yen (FY20: 946m). Earnings have averaged 1.1b yen over the last five years.

The balance sheet is overwhelmed by excess cash of 9.5b yen. The net current asset value including marketable securities, and the overfunded pension assets amounts to 21b yen. Tangible equity stood at 30.3b yen.

The stock is currently selling for 10.2b yen (501 yen/share), which is at half of liquidation value and 9.3x average earnings.

The return on tangible assets is pathetic at around 5%/year. Capital expenditures appear to be relatively large at 1.5-2b/year. Management reported plans to spend an additional 1.9b yen for production equipment. They should carefully consider the efficiency with which they utilize shareholders’ money.

Dividends topped out at 361m yen/year last year. In addition to 199m of stock repurchases (at an average price of 568 yen/share), shareholder yield is about 5% at market.

The demand for the company’s products appears to be reasonably stable. Though housing construction is weak – demand for energy-saving, disaster prevention, crime prevention, and safety enhancement products within houses appears stable. Moreover, management plans to expand sales of building materials in the ASEAN region via its subsidiaries.

Despite the negatives, it appears that the market has taken its pessimism too far by valuing the equity at such a discount to liquidation value and offering a reasonable earnings yield – and therefore, this stock appears to provide enough of a margin of safety to meet our minimum investment tests.