Geostr Corporation

Geostr (‘company’) manufactures construction materials used in a) the civil engineering segment using reinforced concrete; and b) the building construction segment using precast concrete. It primarily specializes in supplying tunnel structural materials for subways, waterworks, and sewerage.

The industry is blighted by an aging workforce and a shortage of skilled labor. It also faces the unpleasant long-term prospect of a declining population and consequent reduced demand. Further, it is also exposed to rising raw material prices of cement, aggregates, steel, etc.

Nippon Steel (third largest steel manufacturer in the world) owns 42.3% of the company – directly and via subsidiaries. It also generates about 50% of the company’s sales.

The company primarily serves the public sector and therefore its prospects are tied to the Japanese government’s public investment plans, which has been relatively firm in the recent past – though some work has been suspended as a result of the coronavirus pandemic. Moreover, it recently rid itself of a large loss-making subsidiary operating in Singapore and Malaysia (which generated impairment losses and the like depressing recent results).

The company reported TTM sales (to September 2020) of 28.8b yen (FY19: 34.3b), ebitda of 1.8b yen (FY19: 2.3b yen), and net profits of 722m yen (FY 19: 2b yen). The company has earned average net profits of 1.6-1.7b yen in the last five years.

Management have done a reasonably good job of boosting cash collection in the recent past – as a result, the balance sheet swells with 3.9b yen of net cash. The net current assets plus marketable securities (mostly stock in Sumitomo Realty) amounts to 11.3b yen. Tangible equity amounted to almost 20b yen.

The stock currently sells for just under 10b yen, which is an 11% discount to liquidation value, and about 6x average earnings.

Average earnings yield about 10% on tangible assets (net of cash), and average recent dividends yield about 5% at market.

This seems to be a well-positioned company within the Nippon Steel network and it should be able to generate its fair share of public investment orders - and continue operating pretty much as it has in the recent past. On that basis, the current price appears to significantly undervalue the company by not giving any weight to the operating business.