Elite Client Idea #2

Itec Corporation (TSE ticker: 9964; Price: 1518 yen)

Itec (‘group’) is based in Japan and primarily manufactures steel products such as steel bars, plates, pipes, etc. (77% of FY22 revenues), and steel frames for construction (19%). It’s also involved in transportation, warehousing, and machine sales.

It faces rising costs of iron ore, coal, scrap, and transport; and lower prospective sales volumes due to sluggish private capital investment in medium and small-scale construction projects in regional areas.

The group has demonstrated a steady financial track record - reporting FY22 revenues of 84.6b yen (FY21: 67.8b), ebitda of 8.1b yen (FY21: 3b), and net profits of 4.3b yen (FY21: 1.2b). FY21 revenues were largely a result of passing on cost increases as sales volumes were slightly lower than FY20. Profits averaged 3b yen in the last six years.

The group operates with net debt of 11b yen, which is amply covered by current assets. It also has a further 14.3b yen in undrawn borrowing facilities. The net current asset value stood at 10.3b yen; and tangible equity at 34b yen.

The common stock currently sells for 11.9b yen (1518 yen/share), which is 4x average earnings and mostly backed by net current assets alone.

Management paid recent dividends of 700m yen and repurchased stock aggregating 5b yen in the last two years, which is a sizable return to stockholders – a rarity in corporate Japan.

Further, the market has valued this equity at least 50% higher on various fundamental factors in the last three years.

Despite the headwinds, the investor appears to have limited downside at the current price, an attractive average earnings yield accruing to his account, and good prospects for capital appreciation with this apparently shareholder-oriented management.