Note: My original report and supporting data as of 2/26/24 is available in this site.

I wrote about Takeuchi Mfg (“TMC”) on February 26, 2024, when the stock was trading at ¥5,400. My premise was based on the belief that Takeuchi represents a “Non-AI secular growth” opportunity fueled by global urbanization and steady US housing markets. The stock reached its historical high of ¥6,674 on May 9, 2024, after reporting record profits on April 12. Since then, the stock has retreated by 26% to ¥3,995.

Even after this untimely call, I still believe TMC should have a place in value investors’ portfolios. I will discuss my rationale for this belief.

First, the background behind the decline:

1. Volatility in the overall Japanese markets, primarily due to the strengthening of Yen and volatility in US stocks, arising from concerns over a slowdown.

2. A factory fire on July 16 caused investors to worry about extended production delays. Production was halted for two days, but normal production and shipping resumed on July 23. Therefore, the financial impacts are expected to be relatively small.

3. On July 19, 2024, Morgan Stanley downgraded Takeuchi from Over-weight to Equal-weight, lowering the price target from ¥8,300 to ¥4,900. The analyst cited healthy earnings for FY2/2025 due to a strong order backlog and favorable yen depreciation but noted that profit growth is already priced in. The downgrade anticipates a decline in earnings for FY2/2026, due to order backlog normalization and potentially weaker orders unless end markets rebound. Strong Yen will pressure profitability as well. This outlook for the next 12 to 18 months led to the rating change.

For the remainder of this update note, I would like to challenge the MS’s subdued expectation for FY2/26 and discuss TMC’s attractive valuations.

1. JPM’s concern 1: Backlog: Has the backlog been too high compared to the underlying demand?

Below is a summary of the company’s comments on the backlog for FY2/22 through Q1 FY2/25.

1) For FY 2/22: Huge jump in backlog from ¥44,879 MM to ¥133,849 MM: Rebound from Covid bottom

• Sales: Sales of Takeuchi products are closely linked to housing and construction demand. In both Europe and the US, public works projects, such as infrastructure for water and gas pipes, have significantly driven demand.
• New product launch: The group has promoted environmentally friendly products, such as the mini excavator ‘TB325R’ and the lithium-ion battery-powered mini excavator ‘TB20e’
• Volume: Sales of mini excavators, hydraulic excavators, and crawler loaders have significantly increased compared to the previous fiscal year, which was impacted by the COVID-19 pandemic.

2) For 2/23: Further increase to ¥190,747 MM

• Demand remains strong in Europe and the U.S
• To meet this demand, the company has increased capacity. At the South Carolina factory (acquired in 4/22), Takeuchi began producing crawler loaders in 9/22, with over 90% sold in the U.S. This local production aims to shorten lead times and enhance its supply system, boosting sales and market share.
• New product launch: new mini excavator, the “TB335R,” in 9/22.
• Order intake: ¥235.86 Bn, a 2.6% increase from the previous year. However, COVID-19, parts shortages, and unstable overseas conditions have caused delays, reducing production volume slightly. The order backlog increased by 42.5% to ¥190.74 Bn. Despite these challenges, sales reached a record high of ¥178.96 Bn, a 27.0% increase from the previous year.

3) For 2/24: Down to ¥128,897

• Sales Performance: Strong sales in Europe and the US, with increased volumes for mini excavators, hydraulic excavators, and crawler loaders.
• New Product Launches: Introduced the mini excavator “TB350R” and wheeled hydraulic excavator “TB395W” in 3/23, and the mini excavator “TB320” in 10/23, aiming to expand market share with a diverse product lineup.
• Production Capacity Increase:
  • Started crawler loader production in South Carolina, USA, in 9/22.
  • Sequential production of mid-class excavators to begin at the Aoki Plant in Nagano Prefecture in 9/23.
  • Expected to achieve production capacity targets by August 2024, increasing overall capacity by approximately 1.5 times.
• Order Intake and Backlog:
  • Order intake for the fiscal year was ¥150.77 Bn, a 36.1% decrease from the previous year. Decrease in order intake due to adjustments in orders and deliveries, and a shift in order timing from major US rental companies to the next fiscal year.
  • Order backlog decreased by ¥61.85 Bn, totaling ¥128.897 Bn

4) For Q1 2/25: Slight recovery to ¥135,242

• Sales Volume:
• North America: Product sales remained strong due to high demand for non-residential construction work, including infrastructure projects.
• Europe: Sales volumes of mini excavators and hydraulic excavators fell significantly below the previous year’s levels due to sluggish personal consumption and a decline in capital investment caused by high interest rates. Despite a lower sales volume compared to the previous year, the impact of weaker yen and product price increases led to sales amounting to ¥55.174 Bn, a 4.0% rise.
• Orders: The usual order timing from major rental companies in the U.S. shifted to this period, resulting in an order intake of ¥61.519 Bn for 1QFY2/25, a 29.2% increase vs 1QFY2/24. The order backlog increased by ¥6.345 Bn, reaching ¥135.242 Bn.
• Profit: Operating profit increased to ¥11.121 Bn (up 30.2%), and ordinary profit rose to ¥11.739 Bn (up 40.0%), despite rising raw material prices and costs at the Aoki Plant.

During the period cited above, management has increased production and released new attractive products to meet local customer needs. Then, the tone of the management changed in Q1 FY2/25 as the negative impacts from slow down in Europe pressured the sales. Therefore, it is important to monitor the strength of the European economy moving forward.

2. JPM’s concerns 2. Prolonged economic weakness in Europe

According to the report “Europe Construction Market Report and Forecast 2023-2028” by RESEARCH and MARKETS, the Europe construction market was worth $3019.39 Bn in 2022. Aided by the increasing demand for sustainable building materials, advancements in construction technology, and various government initiatives, the market is projected to grow at a CAGR of 3.5% between 2023 and 2028 to reach $3,733.10 Bn by 2028.

During this steady growth for the next 3-5 years, the pocket of weakness has emerged as Takeuchi experienced. According ING, in the of 2023, the European construction industry shrunk 0.2-0.3% due to high interest rates and the weak economy. It is expected to face further shrinkage (-0.5%) in 2024, due to the lingering effects of high interest rates and economic uncertainty. However, the renovation subsector and infrastructure investments are expected to continue growing, driven by sustainability efforts and EU Recovery funds. By 2025, the industry may see some recovery, particularly in the renovation and infrastructure sectors, although new building projects will still be limited by the short-term decline in building permits. Overall, ING concluded that the construction demand will remain solid supported by the huge housing shortage in many European cities.

3. JPM’s Concern 3. Yen appreciation

I am no expert on currency. And I guess not too many have consistently and correctly forecast the directions and timing of exchange rate fluctuations. For example, on 5/22/24, Goldman Sachs Research expected the Yen to remain at or above ¥150 to the dollar over a 12-month horizon.

Now at this writing, Yen is at ¥147.13 after hitting ¥143 on 8/5/25.

JP Morgan and UBS lowered their Nikkei and TOPIX year-end targets due to strong Yen. Both recommend overweighting in sectors related to domestic demand which is a very reasonable recommendation.

However, another way to invest is to focus on a stock that can withstand short-term currency fluctuations by generating long-term growth. And TMC can be one of these stocks.

Takeuchi’s underlying (ex-currency impact) earnings power

 

I calculated the net currency operating profit CAGR from FY2/19 through FY2/24 and found it to be 13% (in red), which is reasonable given the COVID-19 period. In comparison, the company’s reported operating profit CAGR for the same period is 17.8%.

Valuation: 6.5x P/E for the above 13% net currency OP growth

The construction industry is cyclical and tends to trade at a low multiple. Komatsu, the industry leader, trades at a 10x P/E ratio. This low multiple likely incorporates cyclicality, including currency fluctuations. As discussed, TMC’s Q1 FY2/25 results reveal it could not escape the short-term European slowdown. However, as the TAM section of the attached report indicates, Takeuchi’s mini excavator markets are expected to enjoy stable growth in the mid to long term, driven by steady global urbanization.

Comparison to Komatsu, Kubota, Hitachi Const. highlights Takeuchi’s industry-leading fundamentals:

1) Takeuchi reported 66% OP increase y/y in FY2/24 vs. Hitachi Construction’s 2^nd best 22%

2) TMC’s Op margin at 16.6% vs. Komatsu’s 15.7%

3) TMC’s 20.3% ROE vs. Hitachi’s 14.1%.

4) TMC’s equity ratio at 74.5% vs. Komatsu’s 53.8%.

Yet, TMC is trading at 6.52 E FY2/25, the lowest among these 4.

While it lacks Komatsu’s scale, Takeuchi should trade at least at 9-10x. This assumption is reasonable, given Takeuchi’s position as a global leader in the fast-growing mini excavator segment. With Takeuchi’s 2/25 earnings/share estimate of ¥629.4, a 10x multiple translates to ¥6,294, indicating a 58% price appreciation potential from the current ¥3,995 level.

[Disclaimer]

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