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Nisso Pronity Co. Ltd.

Nisso Pronity (‘company’) is a relatively small Japanese operator engaged in the businesses of metal processing (69% of revenues), rubber processing (20%), and construction (11%).

Its metal processing segment is primarily used to manufacture solar cell array support mounts for fireproof panels – thereby benefiting from increasing demand for renewable energy – specifically, the increase in construction of distribution warehouses (which mount solar panels) arising from the expansion of the e-commerce market for merchandise sales.

Sales in this segment fell significantly in the last twelve months due to lack of growth in sales of fireproof panels and decrease in large scale projects. Nevertheless, the orders received and backlog were higher than last year.

Further, the company has increased its ownership of a construction company (now a subsidiary) in the building hardware and metals fitting business as part of management plans to diversify in related fields (resulting in goodwill of 257m).

Sales peaked in the year ended August 2019 at 13.5b yen, and fell to 6.6b yen in the last twelve months. Similarly, ebitda and net profits peaked at 2.4b yen and 1.3b yen before settling at 687m yen and 288m yen respectively. It has generated average profits of 600m yen in the recent past.

Free cash flows in the last twelve months were strained primarily due to heavy capex at the Fukushima plant for a fireproof panel production line, and a non-combustible heat insulating panel production line to support build-to-order manufacturing. These are expected to come online by September 2022.

The company had to take on additional debt as a result – but it still reported a net cash position of 3.6b.

Returns on capital are pathetic, however, at under 6%. But dividend payouts have averaged 160m-200m in the recent past (or ~30% of earnings).

The equity sold for under 3.5b yen at last trade, which is under 2/3rd of net current asset value of 5.3b yen – largely consisting of cash and receivables; and at under 6x average earnings.

Though returns on tangible assets are anaemic, the investor would be acquiring stock at a substantial discount to liquidation value at the current market price, and is likely to enjoy increased earnings from the Fukushima plant.

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