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Elite Client Idea #69

Sanyo Industries, Ltd. ‘Sanyo’ (TSE Ticker: 5958; Price: ¥2139/share)

(Latest financials are for the three months ending June 30th 2023; Year-end: March 31st)

Sanyo is a small Japanese operator in the construction industry engaged in manufacturing and installing lightweight wall/ceiling underlayments (77% of FY23 revenues and 85% of profits), flooring systems (21% of revenues and 14% of profits), and various aluminium building products – for use in residential, commercial, and sports facilities.

The industry is exposed to secular declines in construction demand due to an aging population, and decreases in new housing starts due to rising mortgage costs. It also faces rising steel and aluminium prices (exacerbated by a weaker ¥) and other construction costs.

Sanyo reported TTM revenues of ¥29.3bn (FY22: ¥24.5bn), ebitda of ¥2.5bn (FY22: ¥1.3bn) and net profits of ¥1.8bn (FY22: ¥735mn). [TTM profits included ¥423mn in one-off gains on sale of rental real estate.]

~57% of FY23 revenues were accounted using estimated construction costs to determine contract progress. Revenues over the years were stable averaging ¥27.4bn. Applying average ebitda margins of 6.4% yields ¥1.9bn. Deducting FY23 depreciation of ¥415mn results in ~¥1.5bn of pre-tax operating income.

Net non-operating earnings in FY23 amounted to ¥232mn including rent, electricity sales, work scrap sales, dividends, and others.

Adding the above and deducting taxes results in normal earnings of ~¥1.2bn (backed by cash flows).

The balance sheet is strong with net cash of ¥6.8bn, and a net current asset value of ¥10bn.

Inventory (relative to cost-of-sales) and receivables (relative to sales) are below historical averages.

Excess pension assets of ¥401mn consists of ¥2.9bn in pension assets (mostly in bonds) offset by ¥2.5bn in liabilities - discounted at a conservative 0.8%.

Adding market value of rental real estate (¥1.9bn), market value of stocks (¥651mn), and excess pension assets to net current asset value results in minimum liquidation value of ~¥13bn.

Tangible equity, including the difference between market and book value of real estate (¥935mn), stood at ¥19.3bn.

The equity trades for ¥7.2bn, which is 6x normal earnings and ~55% of liquidation value - yielding 4.7% at market (based on TTM dividends and repurchases). Net of cash, the operating business trades for less than four months of pre-tax operating earnings.

Prospects aren’t entirely bleak as Sanyo caters to the renovation of residential and non-residential facilities in addition to new housing – and its track record reveals its ability to operate profitably in difficult market conditions.

By quantitative measures of earning power and asset value, the stock provides a substantial margin of safety to counter future vicissitudes.

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