7235.JP - Tokyo Radiator Manufacturing

[west]

Here's another Japan idea.

 

Quoting Financial Times:

"TOKYO RADIATOR MFG. CO., LTD. is a company mainly engaged in the manufacture and sale of heat exchangers, fuel tanks and press steel plates. The Company's products include parts for heat exchangers, such as radiators, exhaust gas recirculation (EGR) coolers, oil coolers and fuel coolers, among others; as well as automobile body components, such as oil pans, vacuum tanks, fuel tanks and selective catalytic reduction (SCR) tanks, among others. As of March 31, 2013, the Company had two parent companies, four subsidiaries and one associated company."

 

Earnings have been constant for the last four years, but P/E < 6.0x.  So they've earned 4/6 of their market current market cap during the last four years.  P/TBV of 0.45.  BVPS growth of ~10%+ each of the last four years.

 

Downsides (?):

- ROIC is low relative to some of the other companies I've posted, but it's not bad.  Typically it's ranged between ~11% to ~23%.

- EV/EBIT and EV/EBITDA is also high versus the other companies I've posted, 3.80x and 2.30x, respectively.  (Which are still great numbers for a non-Japanese company.)

- Cash collection cycle as been very slowly growing over the last four years.

- Has some minority interest that I don't understand.  1,108 million Yen out of Total Equity 16,376 million Yen.  If you apply Damodaran's technique of calculating the value of minority interest (multiply the book value of the Minority Interest amount by the industry P/B multiple), the Minority Interest valuation is 1,108m * 1.04x (for Auto Parts manufacturers in Japan from here: http://www.stern.nyu.edu/~adamodar/pc/datasets/pbvJapan.xls) = ~1,155m Yen.  So I guess not that much out of the total value.  It, like Total Equity, has been growing like wildfire over the last few years though.

 

Enjoy!

[s8019]

Finally there is a catalyst for the stock. According to reuters Calsonic Kansei (which owns controlling 41% stake in Tokyo Radiator) may be acquired by private equity funds

 

http://www.reuters.com/article/nissan-calsonic-sale-idUSL3N1BL1OG

 

The deal may take place as soon as mid-October. FT speculates that Calsonic Kansei buyer will also take Tokyo Radiator private which makes a lot of sense given 9.5 bn net cash on the balance sheet of TR.

 

https://www.ft.com/content/ad82bd60-7a68-11e6-b837-eb4b4333ee43

 

What value may a private equity find assign to Tokyo Radiator? back of the envelope numbers:

 

 

- TTM net income is 1.3 bn yen. If we apply P/E of 10 to industrial business (reasonable multiple for a bsuiness which is fairly stable over the years) that would give us 13 bn yen valuation.

- Plus the company has net cash position (cash + deposits + investment securities - debt) of 9.5 bn

 

So roughly it should be c. 20 bn yen or more.

 

Current market cap is 8.6 bn yen.

 

 

[rukawa]

Seems like the reason for the low valuation is the low return on equity. I think Nate was saying before that Japanese stocks trade at higher multiples when the ROE is higher.

[ccplz]

Who's nate?

[wachtwoord]

Who's nate?

 

Oddballstocks

[s8019]

Well, let's do some back of the envelope calculations.

 

The equity is 19 bn yen, net income is 1.3 bn yen so ROE is 7%. However half of the equity is cash pile which is just sitting there earning next to nothing. So the "true" economic equity which generates earnings is 10 bn. The return on equity is 13% then. If I had discount rate of 10% and assuming no growth I would pay 10 bn x (0.13/0.1) = 13 bn for this equity. And then there is the cash. I again arrive to valuation for private equity buyer north of 20 bn yen.

 

I can slice and dice it in many ways (P/B, EV/EBITDA etc.) but I still arrive to value for a private owner of above 20 bn yen. I don't want to suffer from commitment bias, but I cannot find what is wrong here. For me it looks as a proverbial $100 bill lying on the sidewalk. Many people would say that it cannot be there because somebody would pick it up long ago, but it is.

[oddballstocks]

I owned this before selling it to put the cash towards a downpayment on my house.  For reference I wrote about japanese net-nets on my blog a few years back (link under my handle) and loved this trade.  I still do, but don't own any directly.  They were all sold for the downpayment, which was a very good decision.

 

There are a lot of these $100 bills laying around in Japan that you can pick up for $25 or $30.  There are hundreds.  In a sense that doesn't make this special.  What makes it special is you said some PE firm is going to buy them out.

 

I guess the question is the bid.  Did they sign a LOI but didn't release the bid yet?  Or is it a rumor?  If this is a really solid bid then I'd expect them to pay something higher.  These Japanese stocks jump on buyout bids a lot.

 

 

[ccplz]

http://www.businessinsider.com/r-brief-nissan-eyes-sale-of-calsonic-kansei-stake-to-kkr---nikkei-2016-10

 

What's the chance that these guys don't get taken over?

[s8019]

I don't have any insider information on the deal. However given that Calsonic is limit up today the market attach relatively high probability to the bid.

 

Calsonic acquisition price is at TTM P/E of about 17 based on the price in the article. If we apply the same multiple to Tokyo Radiator we arrive to valuation of 22 bn yen or so. And, unlike Calsonic, TR has 9 bn of cash on the balance sheet which is a nice bonus for the acquirer.

 

Then of course there is a question on what is the probability of TR being acquired. I guess it is rather high if Calsonic deal goes through. Or else private equity firm leaves all this cash unattended?

 

Anyway a company with a non-zero chance of being acquired by a private equity firm in several months time still trades at zero EV? Unbilievable, but $100 bill is still lying on the sidewalk.

[writser]

Agree that this looks very interesting. Will take a closer look the coming week. One quick comment: the PE buyer will obviously try to buy this as cheap as possible. The Calsonic acquisition price of 17x TTM P/E is paid to get from 0% ownership to an (almost) majority stake in a competitive auction with multiple bidders. But if one of the bidders succeeds and owns 41% of TRM they are certainly not going to pay 17x TTM PE + cash to buy out a few minority holders. Still, a bid around 900 or a dividend followed by a tender offer should offer an excellent return.

[s8019]

An update: KKR agreed to acquire Calsonic at 1860 yen/share (tender offer expected in February 2017). It implies P/E of about 21 and P/B of 2.5. It's crazy valuation in my view but what do I know. TR still trades at P/E of 8.5x and P/B of 0.67.

 

 

[writser]

For some reason I missed the boat on this one. Well done s8019. I'm not sure I like it at current prices as there i no timeline whatsoever. Still, not the worst idea in the world.

[constala]

From less than 700 to 1120 in 4 months and pretty much a straight line- this stock is the gift that keeps on giving! Funny how a slow steady rerating is satisfying.

[writser]

Funny how a slow steady rerating is satisfying.

How about the steady rerating the past few weeks? (sorry, couldn't help myself .. )

 

I bought some shares the past few days. According to the latest quarterly they now have close to 10b in cash vs a 14b market cap. It seems like an absolute no-brainer for KKR to unlock the value on the balance sheet. Key issues are: will they do it quickly and will they screw minority holders (for example by doing a take-under) or treat them fairly (for example by pushing for a special dividend or share buyback). Also the question remains whether KKR can pull things off in Japan.

 

That said, if KKR pushes for a special dividend the company can easily pay out 8b yen. Valuing the stub at 8x earnings yields another 9b yen or so for a ~25% upside. And I think that's actually conservative: the company can probably sustain a larger return of capital and the stub has a very decent ROIC, generates decent cashflow and has a PE majority owner that will be looking for cost savings / synergies. And you can buy it at a ~3.5x ex-cash P/E. I like it.

 

Another interesting Japan idea was featured on VIC a few weeks ago: PanaHome. This is like the worst case scenario that could happen with Tokyo Radiator. Panasonic owns ~40% of PanaHome and tries to buy it on the cheap. A Hong Kong activist has bought 5% of PanaHome, is arguing the price is too low and goes to court. From the write-up:

 

They are litigating the fair value appraisal in Japanese courts and petitioning other shareholders in front of an upcoming June shareholder vote. Furthermore, Oasis has positioned the deal as a broader test of Japan’s commitment to the corporate governance reforms that have been advanced under Prime Minister Shinzo Abe. Many of these reforms deal specifically with improving the protection of minority shareholders. As a result, the PanaHome deal is receiving high levels of scrutiny from both the media and business community.

 

Oasis believes that Panasonic’s offer provides no credit for PanaHome’s large cash balance and that the fair value for the business is closer to ¥1300-¥1600 per share when factoring in the cash, an analysis that is fairly self-evident. Oasis also believes that the process and methodologies used by PanaHome’s board to justify the takeover price are highly flawed. For example, the exchange ratio was set below the midpoint of the calculated fair value ranges and the comparable peers analysis includes a number of incomparable small and illiquid peers while omitting some very relevant peers.

 

At first glance the activists seem to have a point: to me the price paid looks (by Western standards) way too low. Currently PanaHome is trading at a 1.5% premium to the original offer. Most likely Panasonic buys the company on the cheap and you lose 1.5% but if the activists win the price could easily go up 30%. I have no position - still pondering whether this is a good idea or not. How likely is a 5% foreign activist to succeed? These guys did have some victories in the past - no total clowns.

[writser]

Panasonic announced today they will switch to an all-cash offer of 1200 yen. Last trade: 1031 yen. Obviously I didn't buy PanaHome after pitching the idea here. **** me.

[giofranchi]

Panasonic announced today they will switch to an all-cash offer of 1200 yen. Last trade: 1031 yen. Obviously I didn't buy PanaHome after pitching the idea here. **** me.

 

Well, I guess you cannot possibly buy every single bargain out there...

Anyway, great job again!

 

Cheers,

 

Gio

[Paarslaars]

Panasonic announced today they will switch to an all-cash offer of 1200 yen. Last trade: 1031 yen. Obviously I didn't buy PanaHome after pitching the idea here. **** me.

 

Would have been some nice returns for a 1day trade  ;D

[s8019]

Writser, it was not even my idea, it has been pitched in FT where probably several hundred thousand people read it or may be few millions.

 

Anyway what's your best guess for "base rate"? I mean how often KKR (or other PE firms) screw minorities in similar situations?

 

 

[writser]

I have no idea and that's why I didn't pull the trigger on Panahome (i.e. I wanted to get the upside for free). I would guess the base rate is slim (<20%) but it could be possible that Abe's reforms are very slowly starting to have some effects. An article on Bloomberg today about activists in Japan: https://www.bloomberg.com/gadfly/articles/2017-04-24/yankee-hedge-funds-don-t-go-home-japan-wants-you . Also, the KKR deal itself was kind of a big deal: a US private equity firm buying a controlling stake in a Japanese company? Doesn't happen often afaik. Maybe the landscape is slowly shifting. But again, I don't know. Just some random thoughts.

 

In the past, hedge funds in Japan faced not just hostile boards but a belligerent press and government in their attempts to shake up companies. Abe's push to have companies use cash more productively and better protect minority shareholder rights has changed the landscape.That may spell an end to on-the-cheap buyouts such as Toyota's $3.1 billion purchase of Daihatsu Motor Co. last year (which was opposed by Stamford, Connecticut-based Arga Investment Management LP) -- given the right kind of prodding from hedge funds.

 

I have a hard time keeping track of Japanese mergers (no Bloomberg). If anyone has some tips or a good website to track them it would be appreciated.

[writser]

Up ~10% today on 5x medium volume (volume is not super meaningful given that the average is ~$100k / day). As often happens in Japan (at least for me) I can find no news whatsoever. It's been roughly a year since KKR bought Calsonic (and thus their ~40% stake in Tokyo Radiator). So far no action taken. I don't mind owning it for another year or so to see how things work out. Still looks cheapish even without any changes.

[writser]

It's been a while since somebody posted here. A few tidbits:

 

To achieve scale Calsonic Kansei (backed by KKR) bought Magnelli from Fiat in 2018. The company is also shuffling a lot of names around. Currently has a foreign CEO, CFO and Chief Transformation Officer. So presumably they are busy 'transforming things'.

 

A UK asset manager with the original name 'asset value investors' that presents itself as having a bit of an activist bent owns a small stake in Tokyo Radiator. (their new Japan Opportunity Trust might be an interesting starting point to search for undervalued Japanese small caps).

 

TTM results at Tokyo Radiator look satisfactory. ~11b jpy in cash on the balance sheet, NCAV ~14b jpy versus a market cap of ~13b jpy.  Earnings and FCF ~800m jpy. Still very cheap but only if they do something sensible with their excess cash. Full-year results will come out in two months.

 

Still, it's been almost two years since I bought yet nothing has happened and shares are slightly down since. Strange, I'd say ~$100m in excess cash at a subsidiary company is low-hanging fruit for a private equity company.  So my thesis isn't exactly working out yet. Either KKR is encountering problems I am unaware of, their incentives aren't exactly aligned with mine or I completely misunderstand the whole situation.

 

I don't want to get stuck in this name, I'm probably selling this year if, a few months after the AR comes out, still nothing is happening.

[writser]

Results for 2019 have been released but no annual report yet. Results were decent and the balance sheet is still very conservative with ~10b jpy in cash and investments. Small dividend announced but yield and/or payout ratio are still ridiculously low. Some things are happening though. An organisational reshuffle and a new CEO is incoming (who has worked for Calsonic Kansei for ~40 years). The old CEO will become chairman of the board.

 

Still, I'm probably selling soon. The company is still cheap but there is enough stuff in Japan that is cheaper on a quantitative basis and the hoped-for catalyst that was at the heart of the thesis hasn't shown up the past two years. Time to admit defeat. Some small things are changing now but it is hard to read the leaves. Will a former Calsonic employee have the best interests of minority holders at heart? After having followed similar situations in Japan for a while a very opportunistic takeover / takeunder doesn't seem an impossible scenario either.