Yurtec Corporation

Yurtec is a contracting company primarily engaged in “equipment construction” – for electrical, communication, air conditioning, and other general equipment. This activity accounts for 98% of revenues. It is also engaged in miscellaneous businesses such as leasing of equipment, security services, and manufacture/sale of mineral water.

Tohoku Electric Power (‘Tohoku’) owns 41.8% of the company – and contributes 42% of its revenues.

Its equipment construction business includes: a) indoor wiring work, b) power distribution line construction, c) power transmission and information/communication work, and d) air conditioning pipe construction.

Recent regulations requiring Tohoku to tender work to external companies has curtailed orders for the company and subject it to greater competition, and this may continue to adversely impact operations. (Sales have declined continuously since 2016 – see below.)

In addition, it is subject to all the pains afflicting Japan’s construction industry such as lower prospective demand due to a shrinking population, rising material costs, and labour shortages. The coronavirus pandemic has further dampened demand and reduced capacity utilization. As a result, operating profits turned to losses in the last six months.

The company reported TTM sales (to September 2020) of 193.6b yen, down from 227b yen in 2016. Similarly, net profits fell from 10.5b yen in 2016 to 4.2b yen (TTM). Earnings and free cash flows averaged 7.4b yen/year in the last five years.

The balance sheet is strong with net cash of 36.9b yen and net current assets (including securities at market, overfunded pension assets, and investment properties) amounted to 66.4b yen. Tangible equity stood at 117.9b yen.

The stock is selling for 58.7b yen (821 yen/share) – at a 12% discount from liquidation value and 8x average earnings and free cash flows.

Dividends averaged a paltry 1.4b yen in the recent past, yielding just over 2% at market.

Management have set themselves medium-term targets of 220b yen in sales and 9b yen in operating income before taxes. This would constitute a satisfactory return at the current price. Further, they intend to expand operations in Vietnam, which promises low costs and growing demand.

It’s possible for the capital investment cycle to remain sluggish for a prolonged period of time – but in our view, the current market price offers enough of a safety margin for the stock to qualify as an investment purchase.