Sanko Techno Co. Ltd.

Sanko Techno (‘company’) manufactures and sells fastening materials (75-80% of sales) and functional materials (20-25%) – primarily used in the construction industry. Its sales are generated in Japan but it has subsidiaries in Thailand and Vietnam as well.

The company’s fastening materials include post-construction anchors (its flagship product), drills and fasteners, and related earthquake-resistant supplements.

Its functional materials include electro-hydraulic tools, fiberglass reinforced plastic (FRP) sheets, electronic printed circuit boards, and various measuring instruments (like breathalyzers). It also recently acquired a subsidiary importing plastic molding and packaging machines from Europe.

The company’s fortunes are largely tied to the Japanese construction industry, which is off the peak of the Tokyo Olympics construction boom, and sluggish currently. The industry suffers from intractable problems of skilled labor shortage and also rising material costs. Further, its products are exposed to rising steel, nickel, and iron ore prices. Moreover, the coronavirus pandemic has suspended various construction projects.

Despite these headwinds, sales declined only slightly and profits were up due to better administrative cost control.

TTM sales (to September 2020) were 18.3b yen (FY20: 18.5b), ebitda was 1.9b yen (FY20: 1.8b), and net profits were 1.1b yen (FY20: 1b).

The financial position was strong with net cash of 1.5b yen. Net current assets plus investment properties (Tokyo commercial properties generating rent) and securities (listed Japanese stocks) at market amounted to 6.7b yen; and tangible equity was 13b yen. (Other notable features of the balance sheet is the fairly large book value of land at 3.4b yen offset by employee retirement obligations of 1.2b yen.)

The stock is selling for 7.3b yen (899 yen/share), which is just over net current asset value, and at 6.6x ttm earnings. After backing out cash, the operating business sells for just 5.3x ttm earnings.

The return on tangible assets (net of cash) is at a reasonable 10%, and dividends plus share repurchases yielded 4% at market. Recent repurchases were at 900 yen/share. (The company has 83m shares reserved for management stock compensation offsetting 657m shares of treasury stock.)

Considering the fairly basic nature of the company’s business, and creditable performance during a period of severe headwinds, we think this stock is reasonably priced to qualify as an investment purchase.