Toso Corporation

Toso (‘company’) manufactures and sells interior-decoration related products focused on windows - such as curtain rails (approximately 44% of sales), blinds (44%), and partitions among others (12%). These products are sold primarily through distributors mainly in the housing market. It also has a small operation in elderly care products such as canes and walking sticks.

Its operations are primarily based in Japan (90% of tangible assets) but it has subsidiaries in Indonesia (7%) and Shanghai, China (3%) as well.

The company’s fortunes are tied to the Japanese construction market, which is experiencing declining activity – initially due to the consumption tax hike in 2019 and then exacerbated by the coronavirus pandemic. In addition, it faces increasing logistics costs due to labour shortages. It is also exposed to rising input costs of steel, aluminium, and natural wood products – a lot of which is imported, and subject to currency exchange risks.

It reported TTM sales (to September 2020) of 21.6b yen (FY 2020: 22.7b yen), ebitda of 1.5b yen (2020: 1.6b yen) and earnings of 533m yen (2020: 583m yen). Average free cash flows were substantially higher at 832m yen/year – and probably a better indicator of cash generating power.

The balance sheet is strong with net cash of 1.3b yen. Net current assets including liquid securities at market, and overfunded pension assets, amounts to 7.8b yen.

The stock is selling for 4.4b yen, at a 44% discount to liquidation value, and 5.3x free cash flows.

Dividend payouts are meagre at under 100m yen/year in recent years but this was bolstered by substantial repurchases of stock of 350m yen/year in the last two years. This adds up to a 10% yield for shareholders.

Management intends to continue focusing on non-residential properties such as hotels and commercial properties, which helped sustain sales levels this year. They also intend to focus on expanding business in the rest of Asia as well as in the elderly care segment.

This appears to us to be a small and neglected but steady operator, which is selling very cheaply on the basis of its earning power and financial position despite the weak near-term prospects.