Fisco : Company Research and Analysis Report

COMPANY RESEARCH AND ANALYSIS REPORT

SAKAI HEAVY INDUSTRIES, LTD.

6358

Tokyo Stock Exchange Prime Market

26-Dec.-2022

FISCO Ltd. Analyst

Noboru Terashima

FISCO Ltd.

https://www.fisco.co.jp

• Index

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• Summary

Results in FY3/23 1H surpassed initial forecasts, operating profit increasing 47.2% YoY with full swing demand recovery in both domestic and overseas markets

Sakai Heavy Industries, Ltd. <6358> (herein after also referred to as "the Company") is a manufacturer specializing in road rollers for road paving and other road construction equipment. It has a long history in this field, and boasts the industry's highest market share in Japan at over 70.0%. In recent years, the Company has been focusing on developing overseas markets, especially in North America and Southeast Asia.

1. Outline of results for FY3/23 1H

In the consolidated results for FY3/23 1H, net sales increased 14.7% year on year (YoY) to ¥14,891mn, operating profit increased 47.2% YoY to ¥1,067mn, ordinary profit rose 49.5% to ¥1,095mn, and profit attributable to owners of parent increased 60.8% to ¥818mn. In Japan, net sales were strong against a backdrop of measures to accelerate the national resilience plan, but operating profit decreased due to cost increases, including rising raw materials costs and soaring energy prices. Meanwhile, overseas, performance was strong in both the U.S. and Asia (particularly in Indonesia and Vietnam), and both net sales and profits increased. As a result, FY3/23 1H operating profit came in significantly over the initial forecast (¥650mn). Current orders are strong, and if there are no issues with the supply chain for materials and the like, net sales and profits can be expected to grow further.

2. Outlook for FY3/23

For FY3/23 consolidated results, the Company revised initial forecasts (net sales of ¥29,300mn and operating profit of ¥1,500mn) significantly upward for net sales of ¥30,000mn (up 12.8% YoY), operating profit of ¥2,020mn (up 46.0%) ordinary profit of ¥2,050mn (up 45.6%), and profit attributable to owners of parent of ¥1,520mn (up 6.5%). The slow growth rate of profit attributable to owners of parent is mainly due to the absence of temporary deferred tax assets recorded (¥381mn) that occurred in the previous fiscal year. The outlook for net sales and profit by region has not been disclosed, but the Company's policy is to pursue sales increases in all regions. In spite of the fact that construction machinery is on track toward stable recovery as infrastructure investments increase globally, there are many uncertain factors including further increases in material prices and the heightening of pressure to reorganize supply chains, in addition to the impact of the situation in Russia and Ukraine. For those reasons, even though there has been an upward revision, the Company still has a cautious outlook for the full-year.

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COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd. https://www.fisco.co.jp

Summary

3. Medium- to long-term growth strategy

In June 2021, the Company released its "Medium-Term Management Policy" which runs through FY3/26. The ultimate goal is to increase corporate value and shareholder value, and in order to achieve this, the Company will promote a "business growth strategy" and an "efficient capital strategy." In terms of numerical targets, in FY3/26, the Company is aiming for net sales of ¥30.0bn, operating profit of ¥3.1bn, ROE (return on equity) of 8%, and will aim to maintain a stable dividend payout ratio of 50%. Net sales developed at a pace exceeding the plan in its first year of FY3/22, but the policy currently remains the same, and the Company has kept these numerical targets unchanged. For FY3/23, the Company was again planning to pay an annual dividend of ¥165.0 (dividend payout ratio 73.6%), but given the Company's strong current performance and ROE forecast to exceed 6.0% and the promised dividend payout ratio of 50%, it announced an increased annual dividend of ¥180.0 (interim dividend of ¥80.0 and fiscal year-end dividend of ¥100.0). The Company should be rated highly for announcing a clear capital policy to improve ROE and then implementing shareholder returns in accordance with that policy.

Key Points

• Japan's leading manufacturer of road rollers with a long history. Domestic market share is over 70%, and the Company aims to grow by expanding its overseas market share
• The Company's initial forecasts for FY3/23 were revised upward, and it is forecasting a 46.0% increase from the previous fiscal year in operating profit
• As medium-term numerical targets, the Company is aiming for net sales of ¥30.0bn, operating profit of ¥3.1bn, and ROE of 8% in FY3/26

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Source: Prepared by FISCO from the Company's financial results

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• Company profile

The top manufacturer of road rollers with a long history

The Company develops as a specialized manufacturer of road rollers for paving roads and other road construction equipment, and currently, the Company is the top manufacturer in Japan, and boasts a market share of over 70%. In 1970, the Company established a joint venture in Indonesia, as part of the Company's effort to expand business overseas at an early stage. As of March 31, 2022, the Company has four domestic subsidiaries, and five overseas subsidiaries (U.S., China, three in Indonesia). The Company listed its shares on the Second Section of the Tokyo Stock Exchange in 1964, and its shares were reclassified to the First Section of the Tokyo Stock Exchange in 1981. In conjunction with the Tokyo Stock Exchange's market recategorization in April 2022, it moved to the Prime Market.

• Business overview

The top manufacturer of road rollers with a domestic market share of over 70%. Will seek growth by offering high value-added and expanding overseas market share

1. Business description

The Company's main business is the manufacture and sale of road rollers used in road paving and other applications, and road roller-related net sales account for approximately 95% of all net sales. Also, the Company's corporate philosophy is to "Contribute to the social project of global land development through the road construction equipment business."

The term "road roller" actually covers quite a wide range of machines in terms of capabilities and size, among other features. The Company has roughly 20 platforms alone for road rollers, and when different variations are added the total number of products is in the 70-80 range. There is also a wide range in sizes, from 1 ton to 20 tons (for large civil engineering projects). The core price range is from ¥5mn (medium-size rollers) to ¥10mn (large rollers), but the Company also has road cutters and other machines that cost tens of millions in yen. Production is carried out on an expected production basis, and the Company does not manufacture machines based on individual orders. The useful lives of the Company's products are in the 20-30 years range, but very few customers use a machine until the end of its useful life. In most cases, they replace it after statutory depreciation (7-10 years) with a new one. Most of the depreciated equipment are resold as used machines to overseas customers (especially in developing countries).

In terms of net sales by region in FY3/22, net sales in Japan were ¥14,292mn (53.7% of total net sales), net sales in North America were ¥5,039mn (18.9%), net sales in Asia were ¥6,492mn (24.4%), and net sales to Other regions totaled ¥775mn (3.0%). Moreover, in terms of net sales by region in FY3/23 1H, net sales in Japan were ¥7,181mn (48.2%), net sales in North America were ¥3,307mn (22.2%), net sales in Asia were ¥4,119mn (27.7%), and net sales to Other regions totaled ¥282mn (1.9%).

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