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.