Mori-Gumi Co. Ltd.

Mori-Gumi (‘company’) is a small civil engineering and construction company – with minor operations in real estate sales/leasing, and manufacture and sales of crushed stones. Asahi Kasei Corporation owns 30.26% of the company.

Its civil engineering and construction segments are roughly split 50:50 on a revenue basis. Its orders are also split roughly halfway between the government and private sectors. About 1/3^rd of its projects are categorized as “special mission”, and 2/3^rd are generated as a result of competitive bidding. Two customers accounted for 35% of its revenues.

The travails of the Japanese construction industry include lower prospective demand due to an aging population; and a real shortage of skilled workers joining the industry. The coronavirus pandemic led to delays and suspensions of major contract work.

Though reported sales in the last six months were higher over the previous period, construction orders were down 20%.

The company reported TTM sales (to September 2020) of 28.1b yen (FY19: 34.2b), ebitda of 1.6b yen (FY19: 3.3b), and net earnings of 957m yen (FY19: 2.2b yen). Average earnings and free cash flows exceeded 1.4b yen/year.

The remarkable aspect of the balance sheet is the excess cash of 7.8b yen. Net current assets including the overfunded pension assets and securities at market amounted to 9.9b yen. Tangible equity was approximately 12b yen.

The stock is currently selling for 9.7b yen, which is just under liquidation value. But after backing out cash, the operating business could be had for just 1-2x earnings.

Dividend payouts haven’t always been generous but the TTM dividend of 458m yielded just under 5% at market.

As the cash is likely to be used within the business, the return on equity assumes importance. This is a respectable 12% on an average earnings basis (and 8% on a TTM basis).

Though the industry’s outlook is bleak, the company is constantly engaged in achieving production efficiencies – such as using a precast method that enables efficient design and construction work. As such, construction sites are undergoing major changes. Moreover, though demand for new projects may be declining, there is considerable amount of work required in maintaining Japan’s infrastructure – and this could be a source for continued earnings.

Overall, this business is currently available very cheaply net of cash; and the past record of returns on equity promises reasonable returns with an adequate margin of safety.