Tsurumi Manufacturing – value stock worth more than a cigar butt, priced as trash

by admin on October 21, 2012

Tsurumi Manufacturing (named after the suburb of Osaka they are based in) makes pumps. Mainly water pumps and mainly for construction. I can feel some people getting queasy already. I reacted that way when suggested to have a look at it by a commentator on my site. The reality is that, although they are very capex-exposed, the company withstood previous shocks surprisingly well, it has a big position in its market, and is treated by the market like trash. Possibly worth picking this up off the pavement, as there is likely more than one puff in it. Lack of clarity in various aspects keeps me hesitant, however.

 

Now, some quick notes on the financials:

 

Balance sheet:

Curr. A. – Total L. = 22.8 – 8.9 B (i.e. 13.9 B yen of NCAV while mkt cap is 16.2 B yen – quite close to being a net-net)

 

Shareholders’ equity is 37 B yen vs. 34.6 B in 2008, so that is a CAGR of 1.8%, but there was (obviously) a dip in ’09. The CAGR from the dip was 3.3%.

 

Over the past five years:

Receivables dipped from 13.6 B in ’08 to 11.98 B in ’10 and now are back, at 13.4 B in 2012.

But… inventories have fallen from 6.6 B in ’08 to 5.9 B in ’12.

Seems they are getting more efficient in inventory management – which is good.

 

Other balance sheet notes:

Receivables is c. 12 B, inventories are 5.6 B, cash is 4.2 B.

How much to write down receivables and inventories? The top five counterparties, accounting for 34% of receivables are: an air-conditioner manufacturer, a motor manufacturer, a seal manufacturer, a manufacturer of equipment for LCD displays, and an electronics control and facility manufacturer:

http://www.aichi-elec.co.jp/japanese/prod/index.html

http://www.ekk.co.jp/eng/product/

http://www.sbmatex.co.jp/field/index.html

http://www.ebd.co.jp/

http://www.ebd.co.jp/product/index.html

 

My gut tells me a 70% write-down of finished product inventories (2.6 B), total write-off of semi-finished goods and repair parts (0.97 B + 0.3 B + 0.63 B), a 15% cut to raw materials (1.4 B) and 25% write-down of receivables (12 B) would be about right.  In total, that comes to a reduction of about 5 B yen, bringing the EV up significantly, and really this is important.  Once we throw out what I discourteously call a bunch of garbage (semi-finished goods, etc.), the balance sheet value takes quite a dive. Note that the numbers that I gave above were taken from the annual report, not the last quarter, because the company only gives this detail in the yearly filing. Of course, I could go and smooth it all out by scaling the proportions against last quarter’s numbers, but we’re working with rough numbers here, folks.

 

However, we also need to give them some credit for the land which they have and the investments. Land is on the books at 7.14 B yen – so that is about $89M for 1000m2 of second-tier Osaka/Tokyo office space and about 84,700m2 of factory space. Addressing the factory space first, just to check whether their book value makes sense, I got the weighted average of the first five properties listed on goo.ne.jp for 京都府八幡市*. After sorting by land area, we come to a rough estimate of c. 59,700 yen/ m2 compared with their 82,500 yen/ m2 for their 42,380 m2 factory. So, that is in the right ballpark, but I would mark down that factory hugely – what the hell would you do with it once they move their production offshore?

*where the main factory is

http://house.goo.ne.jp/buy/kansai_la/area_kyoto/26210.html

 

I might give them 15 c on the dollar for the factories, and 50 c on the dollar for the office space. That brings the land value down to 1.3 B yen.

 

Now, out of their marketable securities, about 2.5 B is shares and 5.7 B is bonds. The bonds can be valued fairly highly because a lot of them are seemingly just held as investments – big bank bonds. And, as you know, Japan invented the idea of too big to fail. The shares are mainly “political”, so chop them by three quarters, and chop the bonds by 10%.

So that is another 5.8 B on the valuation.

 

Cashflow:

Look at that huge capex spend!  Eats up almost half their income (in the last FY)!

I hope they are spending it on good stuff – although, given that they have had a high capital spend for a while and their growth is flaccid, I assume that it must be maintenance capex – which sucks. Sucks capital out of shareholders hands and into a big black hole, that is. To be honest, their disclosure on this area is just rubbish – no info in their filings on where this money is going. Shame on them. This makes paranoid investors like me imagine they are building a golf course somewhere in Japan for management’s private use.

However, I did see somewhere that they are moving production of one type of pump to Taiwan, and they plan to grow in SE Asia. This might be the reason for the capex rising recently.

 

Now, on to the business:

Their reporting segments are Japan (79% of sales), N. America (9.7%) and other (11%). Note that the figures given below do not include the intersegment adjustment.

Tsurumi Manufacturing Segments Tsurumi Manufacturing Segments

In Japan, they sell mainly to construction and industrial customers (mainly to rental companies in construction and factories in industrial). Construction has been doing well, because it had a bit of a tailwind with the earthquake rebuilding. That is petering out, but they are getting some traction from selling low-energy pumps (anything energy-saving is popular in Japan – seems like a mania) and high-pressure water cleaning machines. Industrial has been doing well, as have special pumps for applications such as making vacuums. Despite these good volumes, they say they had to lower prices because of competition.

However, their sales of large pumps to large public projects have been impacted due to budget cuts. Prices got whacked, too.

 

In N. America, sales are being driven by public infrastructure works such as for water treatment and subways, particular small/medium pumps for the construction market.

 

Other things to consider:

1. The stock should respond strongly (up) to a falling yen and vice versa.

2. Land – no hidden jewels in their land portfolio, it seems.

3. No rights plan.

4. Big financial institution presence on shareholder register. Companies named “Tsurumi” only hold c. 15% of shares o/s, however, they are the first, second and fourth largest shareholders.

5. Cross-shareholdings: It seems that most of their investments are never going to get sold, so whether you count them or not in your valuation is up to you, but I prefer to take a big slash at the value (e.g. 75%).

6. The Tokyo real estate market is due for a rebound. Construction has been in the dumps and is going to pick up. This is because there was no building for a while, and there is a much greater premium on new buildings here than in other countries. There will be some tightness in the real estate market just based on the pipeline of building completions.

7. Forecast for next FY is for EPS to go down

Tsurumi Manufacturing Valuation Tsurumi Manufacturing Valuation

Valuation:

(B yen)

Mkt cap: 16.2

EV: 2.2

Account for current asset “trash”: 2.2 +  5 = 7.2

Discount for land: 1.3

Discount for investments:  5.8

Adj. EV: 0.1

FCF (5 yr avg):  1.2

 

My overall impressions:

Disclosure is poor, direction/ strategy visibility is absent, and cash flow allocation is unaccounted for. I checked out the ’08-’12 management discussion and analysis, and there was no real explanation of how they survived so well. Just lots of drivel, which typically goes something like “woe is us, the sky hath fallen upon us, there is nothing left – nothing, but to toil away tirelessly …”, basically, the same old Japanese management waffle template.

On a positive note, the stability of the cashflow is attractive. Assuming the recent uptick in capex will revert to the recent mean, you are paying effectively nothing (c. 0.1 B) for 1.2 B yen of cashflow, or you could view it as paying 1.9x free cash flow without all my adjustments.

Q1 commentary was relatively upbeat, but the stock has been tanking. I think that this company is easy to label as a capital-intensive and/or a China play. It is capital intensive – although who knows what that capital is doing, or whether it will see a return. But it is not so much a China play. Southeast Asia may give them a bit of growth, but I would question how far that will move the needle when 79% of op inc is from Japan.

Weaknesses in my analysis:  This whole analysis lacks a competitor comparison – I know little about construction pumps, but I guess their margins could be compared against Caterpillar – both are bashing metal and flogging it (ultimately) to folks doing construction. Tsurumi had op margins of 7.6% last FY, which were much lower than CAT’s 12%. Japanese companies overall have low margins, and an example fellow metal-basher with depressed stock is Sansei Yusoki (6357), which has margins of below 5%. More digging around this competitor issue would be desirable – I will probably do that before considering investing.

I also don’t feel that I really get how the business really works – will their product become commoditized? Is their large market share a real asset in terms of distributors, etc? How long till a pump needs to be replaced? Is China going to launch a “national champion” in the area of pumps? What kinds of contracts do they have (i.e. do they get any maintenance work)? And, importantly, how are they allocating cash. – It’s just outside my circle of competence or I just feel the story is not coming together enough. I would need to go and talk to IR to sort that out, and there are other stocks on the research list that look more tasty. Sure, it is dirt cheap by any measure, but it just doesn’t grab me. The kinds of companies I go for are just “good companies” – i.e. you can see they have some kind of natural advantage, and are cheap, but usually not free. The poster child example is Sotsu, which was very kind to my portfolio.

However, if my diagnosis is correct, then this is a real local baby thrown out with the overseas bathwater. Japanese real estate construction is bouncing back.

Japan office building starts - Yearly Japan office building starts – Yearly Japan office building starts - Monthly Japan office building starts – Monthly

Overall – not a bad price (free) for a company which is depression-resistant and has a macro catalyst going for it.

{ 1 comment… read it below or add one }

Feuerball October 22, 2012 at 2:36 pm

Thanks for the analysis, you have gathered way more detail than I was able to (i guess knowing the language really helps). Competitors would be KSB Pumpen (which I own as well) and in Japan 7312, 6361,6363. Compared to it’s Japanese peers, Tsurumi looks great. I do think the sector is more resilient than people give it credit for.

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