1H update on Takeuchi
Takeuchi published its first half result: lower unit volume, higher operating margin, EPS up 33%, 4% Buyback announced
Takeuchi published its first half result: lower unit volume, higher operating margin, EPS up 33%, 4% Buyback announced. Here are some keynotes related to the latest results and some recent investigation related to Takeuchi.
The article constitutes my personal views and is for entertainment purposes only. The main goal of this article is to log my personal views. Nothing in this article or these posts in this blog should constitute an investment advice. The projections and estimates provided here should be considered as purely speculative. Do your own model and projections. Please refer to the disclaimer at the end of this article for more details
Keynotes
by going though the product specs this week, I realized that the majority of the CTL products were using a Kubota engine. Since Kubota is one of the largest competitor of Takeuchi, I thought this could be a risk. - Refer to Annex 1 at the end on product recap.
After further investigations it seems that a large portion of the hydraulic excavators uses Yanmar engine and the largest one (15 tonnes) uses the Deutz engine. I also saw a compact excavator using a Yanmar engine, although the majority of the compact excavator uses Kubota engine. So in conclusion, Takeuchi uses multiple engine manufacturers. As such, it is able to manage the supplier relationship more fairly.
Still as a smaller company, it does not have the scale to make its own engine. This is a risk that must be kept in mind.
I asked the company to explain why the company does not have a larger presence in the domestic market which is puzzling:
—updated on October 20th—
According to the company, Takeuchi invented the mini-excavator in early seventies and started to sell the product as a OEM to Yanmar (under Yanmar name) in Japan. It was a great success but Yanmar started to copy the product. They then sold the product to an undisclosed incumbent, and they also copied the product after OEM success. So they decided to move out of Japan and focus in USA where they developed their sales network and sold the product under the Takeuchi brand. They later on created a sales network in UK and France and through distributors in other european countries and other countries under the takeuchi brand.
They invented the Compact Track Loader later on and decided to sell it in USA only.
On the 1H numbers:
Sales were up to 109.6 B Yen or 4% higher on lower unit sales but higher pricing and weaker yen.
Operating income was 24.8 B Yen or 46% higher and operating margin was 22.6%. This is up from 16.1 B Yen last year and operating margin of 16.1%. Operating margin has increase by 650 BP.
The company is projecting to achieve 44.5B Yen of operating profit. Trailing 12 mo has operating profit at 43.1 B Yen. So this is conservative.
This chart shows the historical operating income in the last 20 years. Takeuchi has seen a rapid increase in income since 2012. The GFC was very challenging for Takeuchi, since US is their largest market and residential construction went into almost full stop between 2009 and 2011 see housing starts below. This chart will be revised upward even further to 44 500 million yen.
On the yen, the yen started the 1H at 151 JPY.USD, went up close to 160 and finish the 1H at 146 JPY.USD. The yen is currently at 149 JPY.USD.
Last year, in the same period, the yen started at 131 and finished at 145, so much lower than this year - average of around 138 JPY.USD versus over 150 JPY.USD this year. The situation is similar in Europe where the JPY.EUR ratio is much higher in 2024 than in 2023.
Projection for 2H is based off a Yen at 138 JPY.USD. This is too conservative in my opinion, so EPS number is likely to be higher.
Balance sheet: Takeuchi is net cash at 37.4B Yen with no debt. Enterprise value is 187B Yen @4705 per share.
Valuation: Based on 12mo trailing results, Takeuchi is trading at a very low 4.3 times EV/EBIT and 4.2 time EV/EBIT based of conservative projection from management for the current fiscal year.
As indicated in my mid year analysis, Takeuchi and the Wolfpack 21, Takeuchi is trading at the lowest multiple of the top 21 positions of my current portfolio on a growth to valuation ratio. Here is what I stated a few month back:
With the recent result, It is now a 20% grower trading at 4.2 EV/EBIT so trading at a PEG of 0.21, even lower than the 6x EV/EBIT based on the last 12mo results just a few months ago.
The management agrees to me and announced on Oct.10th a 4% buyback to be executed now until January 2025. Management had not done buyback since 2016. So this is a major announcement. They had bought around 1.5M shares in 2016 over a 1 year period.
This excellent operating income resulted in a EPS of 353 yen per share, up 33%. The lower relative increase in net operation income versus operating income is due to a foreign exchange loss of 2.5B Yen.
Management is guiding for 629 Yen per share in the current fiscal year, up from 516 Yen per share last year. Assuming 4% buyback we could get to 650 Yen per share or at a PE of 7.2 times.
In USA, demand for hydraulic excavator was strong, but weaker for the CTL and the compact excavator. Hydraulic excavator are for the heavy lifting, so it might be used more for infrastructure and industrial construction. There was also some issue in the production of CTL. Please note that the finishing of CTL is done in US now. So numbers might be better in Q3. USA represents 57% of sales.
In Europe, sales were down in yen and unit sales. UK had to do promotion (reduction in price) to mitigate weakness and margin collapses 86%. In contrast, in France sales were up 26% and unit sales were up as well, resulting in very strong result. Europe is only buying excavator. We dont have visibility in the other countries. UK is their largest market followed by France. I suspect Germany and Austria is important as well but no specific information.
Takeuchi is expected to pay 200 yen in dividends or 4.2%. If we include 4% of buyback, we are getting a shareholder yield of 8.2% to wait for Mr. market to correctly price this company trading at a steep discount of 4.2x EV/EBIT in my opinion.
Annex 1
A recap on product:
as shown below Takeuchi segments its product into 3 categories:
Compact Track Loader: Mostly sold in USA. Main purpose is to do transportation work to carry earth and sand over a short distance and leveling the ground. Faster than excavator. Engine maker seems to be Kubota engine for most models.
Below 6 tonnes Excavator: For excavation work in hard place to reach.
Hydraulic Excavator: Larger than 6 tonnes. Takeuchi largest product is 15 tonnes. Excavators are used for residential housing construction, industrial application, Lifelines utility and landscaping.
An example of a compact hydraulic excavator is the TB260. It uses Yanmar engine. The
The even more powerful TB290 carrying almost 9 tonnes also uses the Yanmar engine.
The largest hydraulic excavator is the TB2150R which can lift more than 15 tonnes. It uses the Deutz engine. Deutz AG is a German internal combustion engine manufacture. It trades at 7x PE for anyone interested.
Very informative post. Thank you so much.
Thanks for the update, cleared up the main questions I had in the previous post.