Introduction
After the buyout of Logistec last month, I went into intensive searching mode to find a good port infrastructure company to replace Logistec. I stumbled on Kamigumi by chance, a 2.4B market cap port operator, by starting to look at all 4000 stocks page by page in the Japanese handbook going from the last page and backward. Luckily to me, Kamigumi is almost at the end of the handbook (page 1920). The words - One of the industry leaders - owns dedicated container terminals and - Enjoy high profitability were music to my ear.
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.
Kamigumi Overview
As shown below, Kamigumi has a net cash of 45B yen (Cash minus LT Debt) and has a large portfolio of LT investment of more than 100B Yen. Net cash + LT investment represents more than 40% of the current stock price. The stock trades at a EV / EBITDA of 7, which is very low for an infrastructure play business. Port infrastructure typically trades at a 10x-20x EV/EBITDA range- refer to peer comparison at the end. Price to book is currently below 1. A Price to book below 1 is a good floor price protection in the context of the new mandatory rules imposed by the Tokyo stock exchange to remain listed - especially on the Prime market. As we will see later, Kamigumi has been very generous in terms of shareholder yield in the recent years. Also, Kamigumi owns a unique and valuable set of assets. i.e a set of port infrastructure established in a developed and strong country. Furthermore, Japan is highly dependent on external exports and imports carried over ships. These are essential infrastructures for Japan.
Revenue Split
89% of sales are related to harbor activities and other related logistics activities. Kamigumi provides end-to-end services centered around port cargo handling, but also services related to storing and packaging in warehouses, domestic terrestrial delivery, and even in factory cargo handling. Within this category, 47% of sales relates to the general harbor transportation, including port cargo handling and container terminal operation.
Container terminal business
Kamigumi operates in all major ports of Japan, including 13 container terminals, and even more if you include container terminals with non controlling equity - more on this below.
Kamigumi handles around 2.5m TEUs per years.
To estimate the revenue coming from the container business, I have been using a rough estimate of 135 euro per TEUs handled based on benchmark sales from Termont (200CAD) and revenue from HHFA (Hamburger Hafen und Logistik AG). Using a conservative currency conversion of 140 yen per euro rate (instead of the current 160), we get around 50B yen of revenue generated by the terminal container business, or about 20% of sales.
As such, the other goods (fresh fruits, cars, steel, bulk material, oversized equipment) represent a larger piece of the revenue pie. This is actually good, as the handlings of these goods can be a counter-cycle force to the container trade business cycle as I could observe with Logistec.
49% equity in KLKG holding
Since 2019, Kamigumi has a 49% equity share in KLKG Holding. KLKG stands for K-Line Kamigumi holding. This holding controls 3 subsidiaries operating container terminals and other harbors services in Japan on behalf of K-Line.
Kawasaki Kisen Kaisha $9364 (or K line) is one of the top 3 major marine transportation service transporter in Japan in terms of marine assets - with Mitsui OSK Line and Nippon Yusen Kabushiki Kaisha Line as shown below (in Billion assets).
Kamigumi also took a 0.5% stake in Kawasaki Kisen Kaisha, which is worth around 10B yen.
Daito corporation handles all container terminal operations of K Line in the Tokyo and Yokohama ports with 24B of sales in 2018.
Nitto Total Logistics handles all container terminal operation of K Line in the port of Kobe (RC4) and Osaka with 15B of sales in 2018.
Seagate corporation handles general cargo handling in Hiroshima and other smaller ports in Japan with 7B of sales in 2018. So KLKG holding had sales of almost 50B in 2018.
Port of Kobe
The port of Kobe is a major maritime gateway for all the western part of Japan.
Kamigumi is the most important terminal operator in Kobe. I circled below the container terminals that the company operates.
PC-18 is actually an independently owned and operated terminal, i.e. this is not a concession owned by the Port authority and the berth and surrounding land is actually owned by Kamigumi. A very rare asset.
PC-13 is another container terminal operated by Kamigumi.
RC-4 is operated by Nitto total Logistics which is 49% owned by Kamigumi. The traffic is generated by K Line as discussed previously.
95% of the bananas and pineapple imported via Kobe terminals are handled by Kamigumi. They bought Nippon Port which owned a very large warehouse for fresh fruits in Kobe to consolidate their position in 2019. Fresh fruits harbor handling and storage (temperature controlled) is a very large business for Kamigumi.
Port of Tokyo
Port of Tokyo is the most important Japanese port in terms of container traffic.
The following shows the container operations of Kamigumi in Tokyo. Kamigumi handles only a small portion of the whole container traffic going Tokyo, but still this is significant.
Terminal 6 is also an independently owned and operated terminal. Terminal 10 is part of KLKG holding (49% stake). Terminal 15, called Y1 is a brand new terminals who started operation in 2017.
Port of Nagoya
Port of Nagoya is the most important port in terms of total tonnage. In terms of containers, as shown below, 2.7m TEUs has transited in Nagoya in 2021. Containers is handled by 8 different cargo operators. With 716k TEU, Kamigumi has likely the largest share (26%).
Warehousing
The storing and packaging services in warehouses represents 14% of sales. Kamigumi has more than 60 warehouses spread around the country. It has a very strong presence in Kobe with more than 12 warehouses in the region. There have warehouses close the International Kobe airport and on the Port island itself.
International Ports
Kamigumi has more than 77 equity share in non controlling and unlisted subsidiaries. I was able to identify the following equity share in international port assets in South Asia and in Spain:
51% of Thilawa Multipurpose International Terminal (Myanmar) since 2018
15% stake in Patimban International Port (Indonesia) - car terminal
12.5% stake in Port of Valencia (Spain) - 4.5m TEU
26% in Eastern Sea Laem Chabang Terminal Co (Thailand)
14% of Port Authority of Sihanoukville (Cambodia) - 500k TEUs in 2019.
Cross-shareholdings
Cross-shareholdings which was a common practice in Japan, is in decline as you see in the chart below:
Now the Japan stock exchange is asking all publicly traded company to disclose their plan to reduce cross-shareholding.
Kamigumi has a very large portfolio of portfolio equities with a mix of publicly traded and unlisted equities.
Every semester, Kamigumi is providing an update of the number of publicly traded stocks and unlisted equity. The publicly traded equity is has been slowly decreasing in terms of number of securities, from 86 stocks to 69 stocks. In contrast however, the total value of publicly traded stocks has almost double to 36B yen as of September 2023. It is now more than 40B according to my rough calculation based on the latest report.
As such, the reduction of cross holding ownership over the next few years should generate cash which could return to the shareholder via buyback and dividends.
Cash rich balance sheet
Kamigumi has a cash balance of 65B yen. The cash balance has risen steadily since 2017, except in 2019 when Kamigumi purchased more than 40B of investment securities. I think the bulk of the investment where related to the 49% purchase of KLKG holding which I described previously.
Sizable Investment Securities
As of end of December 2023, the investment securites rose to 96B yen (from 76B in March 2023). Kamigumi’s investment securities is composed of :
46B of unlisted securities as of March 2023
10B of TBJ holding - as of September 2023 - the Japanese led consortium who bought Toshiba
~40B of publicly traded securities as of December 2023
The top 20 publicly traded securities owned by Kamigumi based on the current price reaches 37.7B as shown below:
There are more than 66 stocks in total, so if we include all stocks, we are likely higher than the reported 40B in December 2023 due to the recent raise in the Japanese stock market (Nikkei 225 is up YTD +16%). Kamigumi is pressured to sell those holdings. There was questions from analysts about this.
Share buyback and shareholder yield
As part of the 3-year mid term business plan (2023, 2024 and 2025) ending on March 2025, Kamigumi has pledge to buyback stocks for an equivalent of 30B yen.
As you see below, Kamigumi bought back 4% of its shares in fiscal 2023, and 3.3% of shares for the fiscal year ending March 2024.
Over the years, Kamigumi has regularly bought back shares as shown below. Since early 2019, the number of shares have come down by 15m, a 12.3% share reduction.
In 2023 (ending March 2023), the company has allocated 12.3B to buyback and returned 90yen per share in dividends or close to 10B in dividends.
This correspond to a shareholder yield of 6.1% based on current price.
I would be disappointed if management would not increase the amount allocated to the 3-year plan, and I hope that management allocates another 11-12B yen to buyback in 2024 (fiscal 2025).
Operating Cash Machine
Kamigumi has generated a steady (non cyclical) stream of operating cash flow which have almost doubled since 2012. Based on the last 12 mo (ending September 2023) Kamigumi has generated 38B yen in operating cash flow.
Free cash flow has risen very quickly in recent years, so it seems that Kamigumi does not need to invest as much into the business anymore. Kamigumi is returning more capital to the shareholders or is investing in new business.
Based on the last 12 mo (ending September 2023) Kamigumi has generated 29.6B yen in free cash flow.
The stock trades at an attractive free cash flow yield of 8%.
Historical data
EPS has grown steadily (almost no cyclicality) by 125% since 2012 - from 103yen to 232yen per share. This is a combination of stock buyback, slow revenue growth and grinding their way to achieve better operating margin.
Slow Revenue Growth:
Operating margin have risen since 2020. Operating income has risen from 24B in 2019 and 2022 to 31.5B based on the latest report. Management is confident to keep the same level operating income in the next few years.
The investment income of their large portfolio is also contributing more and more on the EPS gain. However, aggressive buyback and selling their portfolio of holding and cash of 160B yen should provide better returns.
Peer comparison on valuation
For peer comparison on valuation, I used the same set of ports operator that Memyselfandi007 has used to evaluate his excellent recent post on Eurogate. Personally, PE ratio and EV/EBITDA are the best benchmark to evaluate company in general.
In this regard, Port operator are rare and are often expensive.
If we look at the set of operators (operating in stable democratic country and larger than 500m of market cap - I excluded Wilson since it is trading in Brasil which I am not able to trade we get in average:
Average Peer PE : 21.5 - Kamigumi: 14.6 (discount 32%)
Average Peer EV/EBITDA: 14 - EV/EBITDA of 7.2 (discount 48%)
For the other metrics, P/S and P/B, Kamigumi trades at a 65% and 49% discount.
It has also the lowest risk profile, being net cash and operating a broad set of terminals (compare to a single terminal like Piraeus Port or Westshore Terminal relying mostly on coal port handling).
Pros:
Unique and valuable set of assets (port infrastructure play in Japan)
Attractive and large portfolio of Japanese stocks (40B) which have been going up recently
Significant discount based on all valuation metrics with peers
Cash rich
Shareholder friendly with buyback and dividends with a payout of 90%
Long history - very sustainable
Price to Book lower than 1
Could be a takeover target - no controlling entity
Japanese champion in port infrastructure
Cons:
Not family run
Low RoE
Low revenue growth
Recent margin gain may come down
Large portfolio of unlisted stocks which may be difficult to sell
I'm generally a fan of the logistic/infrastructure companies. A lot to like here. Only wish P/B was a little lower, but they check so many boxes with buybacks, dividend growth, and good earnings. Putting this one on the watch list for sure.
Today Kamigumi announced buy back (5,07% shares - 17BN YEN) and showed HY results, and the whole year forecast.
I would really like to know your opinion about these developments.
Thanks.