GL Sciences Inc. (TYO:7705) is a Japanese small cap with two main business segments.
The first makes gas/liquid chromatography equipment
and other related components and equipment. This segment's products are used in a wide array
of industries such as the
chemical, pharma, semiconductor and petrochemical industries.
The second segment makes quartz tools used in the manufacture of semiconductors. This second
segment is a subsidiary called Techno Quartz. Techno Quartz is 65% owned by GL Sciences.
Most of the remainder of the company's stock is publicly traded (TYO:5217).
The chromatography segment of the company is a traditional and slow-growth business.
In the past year the segment revenue grew at 5%. But in the last 15 years this segment has grew a total of just 20%.
It has a 10% operating income margin.
The quartz segment is the opposite, however. It is the crown jewel of the company due
to the tremendous uptick in demand for semiconductors worldwide. This segment
grew at 24% last year and similarly the year before. It has a 20% operating margin.
The company has a third segment involved in automation recognition equipment but it is small
so we'll lump it all with the first segment.
So GL Sciences is a public company with two parts, one of which is also public.
We can use their publicly traded prices and their financial reports
to deduce the market
value and apparent value of the remaining part.
In the GL Sciences financial report, the accounting entries of Techno Quartz are
fully consolidated. This means that the revenues, assets and liabilities
of Techno Quartz are completely included in the GL Sciences financials. So,
consolidated financials present such accounting entries as larger than that which belongs to the company shareholders. But the
net income and equity are presented as that belonging to the parent company shareholders.
The following table shows the financial metrics of the two companies in their financial reports as well as
the portion of the parent company GL Sciences excluding Techno Quartz.
| | GL Sci | Techno Q | GL Sci ex. Techno Q |
|---|---|---|---|
| Price (May 9) | ¥ 2530.00 | ¥ 34050.00 | — |
| Marketcap (M) | ¥ 25957.80 ($ 201.17) | ¥ 26218.50 ($ 203.19) | ¥ 8915.77 ($ 69.10) |
| Shares (M) | 10.26 | 0.77 | — |
| Equity (M) | 30220 | 13778 | 21264.3 |
| Earnings TTM (M) | 2724 | 2200 | 1294 |
| ROE (%) | 9 | 16 | 6.1 |
| PE | 9.53 | 11.92 | 6.89 |
| PTBV | 0.87 | 1.94 | 0.42 |
| Div Yield (%) | 1.98 | 1.47 | — |
| EV/EBIT | 5.9 | 7.7 | 5.3 |
The EV/EBIT and PE metrics all show that the market values the two parts of the company very differently. But this is not surprising given what
we know about their profitability. Still, I think the chromatography part of the company (i.e., GL Sciences except Techno Quartz), is maybe a bit too undervalued. In addition, I think Techno Quartz with a PE of 12 is also very undervalued considering its potential. And finally, I think the company is a good bet overall on the Japanese technology sector which has always been vibrant and strong despite the vicissitudes of the last several decades.
