*Symphony Financial Partners (Singapore) Pte Ltd
This note is my attempt to see 1) what motivates Symphony to invest in Oyo and 2) if there is more upside to Oyo stock.
Symphony’s Oyo shareholdings:
On 11/8/21, it was reported that Symphony initiated a holding of 5.75% in 5/21. The VC’s holdings have fluctuated since then and stand at 7.7% as of 6/24.
Who is Oyo?
Oyo is a construction consultant and offers geological surveys and extensive surveying and design services. Its geological surveys precede civil engineering works and are necessary to examine the strength of the ground and other properties before the construction of large structures such as roads, railways, and power plants. Geological surveys are the company’s mainstay business, and government agencies are its core customers.
It also handles project planning, proposals, design, and supervision for government and private clients, employing specialized engineers across the construction value chain. Construction consultants don’t require a large scale of physical equipment but require specialized engineers whose numbers can be a competitive edge.
There have been M&A activities in construction consulting industries of late. Pasco (an aerial survey co) was TOBed by Secom (was a 71.55% owner) and Itochu and was delisted on 1/7/25. D&E 9161 Construction Consulting Co is also TOBed by Tokyo Marine.
1. Why are these consulting companies attractive to buyers?
The industry is expected to enjoy steady growth, but profitability remains low and volatile, due to 1)high labor costs, 2) low margin government contracts and 3) timing of big projects. However, the use of AI can partially mitigate these costs, potentially leading to improved profitability.
The Japanese construction consulting industry is expected to grow significantly, with market value rising from $ 448.56 bn in 2023 to $571.43 bn by 2030 (by NMSC), driven by large-scale projects and investments to upgrade aging infrastructure systems. The construction industry also needs to focus on sustainability with green materials and energy-efficient designs, faces labor challenges due to an aging workforce, and is adopting digital technologies for improved productivity. Government initiatives also play a role. These factors all combined increase the need for the consultant expertise.
Wind Power which is the Oyo’s focus
According to “Future Energy Policy (June 28, 2023)” by the Agency for Natural Resources and Energy, the Japanese government aims to increase the overall share of renewable energy to 36–38% from 20% in FY2021, with wind power making up about 5% (from 0.9% in FY2021. This means that wind power output is projected to rise from 4,000GWh in FY2021 to 51,000GWh. This should lead to increased activities in wind firm construction.
To maintain its advantage in the expanding offshore wind firm market, Oyo is investing in steel platforms (scaffolding structures) for seabed surveys, and it had a total of 17 as of the end of 12/23. Steel platforms are essential for conducting seabed surveys, and having many such structures allows the company to simultaneously conduct surveys at numerous locations. The company has the largest number of platforms (17) in Japan, while its competitors only have a few.
2. Why Oyo?
I believe Oyo’s strong balance sheet and the below-peer low profitability and OP margin volatility caught Symphony’s eyes.
Improve capital efficiency:
Oya has a high capital ratio of 74% which is one of the reasons for its low ROE.
To enhance capital efficiency, the company will:
- Boost ROE by reducing assets and increasing turnover.
Oyo will sell non-core assets. Cash generated will be used for growth investments Y13-14 bn for hiring and capital equipment investment over 3 years.
- Increase financial leverage through borrowing.
Oyo’s target dividends payout ratio is 50% and it will conduct opportunistic share repurchases.
This part is easy. However, correcting low and volatile profitability is much tougher.
Improve profitability
Oyo’s operating profit margin is 4.3%, while CTI’s is 10.7%. One reason for this disparity is that CTI’s larger scale allows it to spread back-office costs over a greater number of sales. A deeper dive into the two companies reveals the following:
CTI:
Founded in 1963, Japan’s first construction consultancy
#1 in river/water-related areas; planning disaster prevention and mitigation measures against floods and droughts,
OP margin: Domestic 10-15%. Overseas 2.8%
# of professional (licensed) engineers: 1,300, 34% of total consolidated employees.
Employees: consolidated 3,830, Parent: 2,023, Average age: 42.5.
Ave salary: Y 9,580,000
Oyo:
Founded 1957
OP margin: Companywide 4.3%, Overseas OPM 0.6% for FY12/23.
# of professional (licensed) engineers: 800(26% of consolidated employees), PhD 80
Employees: consolidated 2716 Parent: 1270, Average age: 46.9
Ave salary: Y 6,830,000
OPM at both companies is low since they deal with the government and municipalities. The major difference between the two is the average salary: OYO Y6830K vs. CTI Y9580K. Japan is having an acute engineer shortage, so CIT is paying higher salaries to attract talents. This translates to high-quality work which may lead to winning bigger and more lucrative projects.
One way for Oyo to offset this apparent talent gap is to increase its investment in AI
In geological surveys, skilled technicians used to spend 40 to 50 hours to derive a preliminary interpretation of topography from maps and measured values. AI can complete this task in just 30 minutes.
Moreover, IoT measuring instruments (using disaster prevention IoT sensors), the company is now able to ensure continuous internet connectivity, analyze collected data with AI, and instantly share the results with stakeholders through a shared platform.
How to improve overseas profitability
Overseas revenues accounted for around 25% of FY12/23. The overseas revenue is primarily generated by overseas subsidiaries (mainly in Singapore). Profit contributions from the overseas business have been small due to disruptions in the supply chain caused by COVID and the conflicts in Ukraine which has led to, as well as rising material costs.
Management formulated measures to boost profitability. In the 2H of 2023, Oyo reorganized the groups by customers they serve. It also separated domestic and international operations to focus on enhance marketing efficiency in each country and segment.
Symphony may be keen on improving Oyo’s profitability, which should precede any stock price appreciation. Since the company is still on its way to higher profitability (see the guidance section below), the stock may have the further upside potential.
3. Financial Highlights:
Reasons for underperformance in the recent years
From FY12/15 to FY12/17, the company’s revenue and operating profit finished below initial forecasts, with operating profit declining YoY. Revenues decreased as a result of an ongoing contraction in public work projects and the tapering off of reconstruction demand following the Earthquake of March 2011. Overseas, the drop in oil prices adversely affected earnings in the US oil exploration business acquired in 2013, keeping results consistently below initial forecasts. Although the company aimed to reduce its dependence on public works, it was unable to sufficiently transform its business model.
In FY12/22 and FY12/23, sales were solid, fueled by solid activities of seabed surveys related to offshore wind farms. Overseas, contributions from a company acquired in Singapore supported strong revenue. However, profits were impacted by 1) components shortage due to supply chain issues and the Ukraine conflicts led to specification changes that drove up costs. 2) rising SG&A expenses, including labor costs.
FY12/24 upped guidance
In 11/24, the company revised full-year earnings forecast for FY12/24 as bellow:
Revenues: Y73.0bn (previous forecast: Y66.0bn)
Operating profit: Y3.5bn (unchanged)
Pretax profit: Y4.3bn (Y4.0bn)
Net income: Y2.9bn (Y2.6bn): The 28% year-over-year decline in net income is due to the lack of gains from marketable securities sales.
Annual dividend: Y68.0 per share (vs the previous forecast of Y58.0 per share) for FY12/24.
Reasons for revision
1) solid performance in power generation-related operations, 2) progress in disaster recovery support operations in the Noto Peninsula, and 3) revenue growth at overseas companies.
The mid-term plan:
As financial targets, the new three year medium-term plan calls for FY12/26 (the final year) revenue of Y78.0bn (Y65.6bn in FY12/23; CAGR of 5.9%), OPM of 8% or higher (4.3%), and ROE of 6% or higher (5.6%).
The company intends to allocate Y10.0–11.0bn to shareholder returns, including share buybacks, over three years. To this end, it plans to control increases in shareholders’ equity, reduce the equity ratio from 74% in FY12/23 to 60–65% by FY12/26.
Segment Strategy:
Disaster Prevention and Infrastructure-Slow growth segment: FY12/26 targets are revenue of Y29.0bn and OPM of 7.0%
Core services:
Natural disaster damage prediction and measurement services
Disaster prevention plan formulation for rivers and basins.
The segment strategy focuses on business efficiency and the selection and concentration of products and services.
Environment and Energy-Strong growth segment: FY12/26 targets: revenue of Y30.0bn and OPM of 9.6%
Core services: Soil and groundwater contamination surveys and the formulation of specific waste and disaster waste management plans. Seabed surveys for offshore wind power projects, and provides support for inspection and approval processes for the reactivation of nuclear power plants, and other services.
Strong demand due to the accelerating severity and frequency of natural disasters in Japan. Stable investment in wind and nuclear power, both non-fossil energy sources, as the government continues to pursue a decarbonization strategy.
International: FY12/26 targets are revenue of Y19.0bn and OPM of 7.0%
In this segment, Oyo aims to strengthen collaboration among group companies and enhance cross-selling.
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