Tokyo Energy and Systems Inc.

Tokyo Energy (‘company’) designs, manufactures, and sells electric power equipment for the thermal, nuclear, hydro-electric, and solar power generation industries. It procures orders for construction as well as operations and maintenance of equipment.

The company is 26.5% owned by Tokyo Electric Power Company (TEPCO). It generates 80% of its orders on “special mission” projects and the balance on competitive bidding. Its major customers are TEPCO, JERA (the largest power generation company in Japan), and Mitsubishi Electric – which accounted for 56% of 2020 sales. Practically all sales are currently in Japan but the company recently expanded into Thailand by investing in a subsidiary to exploit the growth of future energy demand from South East Asia.

Recent orders fell 13% over the year as a result of reduced construction work for thermal and solar power industries – but nuclear power work has picked up.

The industry is subject to full-throttled competition resulting in price wars and pressures on sales and profitability. It is also experiencing soaring material and labor costs, and is liable to restore equipment damaged by natural disasters (which resulted in a 340m yen loss in FY 2020).

The company has posted continuous declines in sales from 74b in 2016 to 64b (TTM). Earnings have fallen from 4.1b yen to 2.8b (TTM).

Annual results are lumpy due to the nature of the construction industry and accounting – but the company generated average earnings and free cash flows of 3.4b yen/year.

The balance sheet is strong with 18.5b yen in net cash. However, 12b is committed to constructing a woody biomass power plant by 2022, which is expected to generate 166m kilowatt hours of annual output. This would meet the annual power demand for 55,000 households. At current prices of about 25 yen/kilowatt hour, this is expected to add over 4b in revenues or 6% to TTM sales.

The net current assets including listed securities at market presently stands at 41b yen. Net tangible assets amounted to 64b yen. In comparison, the stock is selling for 31b yen – at a 24% discount to liquidation value and 9x average earnings.

Dividends have averaged 900m yen/year yielding 3% at market.

Even after accounting for the capital commitments (and earnings increases), the stock appears underpriced below liquidation value with a reasonable earnings yield, and would meet our minimum investment tests.