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.
Thank you for writing up this company. The needs of the semiconductor market makes the subsidiary company of particular interest, as you point out.
ReplyDeletea) Does Japanese business culture usually perform spinning out of subsidiaries to shareholders? Do you have any feel regarding this? Common in the US but Japanese business practices are unique.
b) Singapore stocks are easy to research because of the great SGX website in English. Is there an equivalent for Japan for English speakers? If not, how did you go about reading the reports on this company.
Thanks.
Hi, I am not sure what you mean by spin out. The company has already spun-out techno quartz, and up to 35% of the company floats freely on the japanse market. The other 65% the parent company owns and is a major component of the parent. And frankly I like it the way it is setup. The arbitrage opportunity is the reason why I bought.
DeleteAs for the language barrier I think it is becoming less and less of an issue. I simply use google translate and the quality is getting better and better. I am much more concerned about how a market treats minority shareholders. In that respect I think Japan, South Africa, european countries are all good.
Thank you the response. Unfortunately, I did not express myself well. Many US companies will offer a percentage of a subsidiary to the market to purchase, like the 35% that was done here. After the subsidiary trades on its own for some time (6 months to years) many US companies will give the remaining 65% to its shareholders on a prorated basis. My question was to ask if you find Japanese companies doing the same or would it be very rare for them to do so?
DeleteAlso, what site do you use to see this company's filings?
ah I get what you are saying, it is like MO spinning off Kraft. Ok I don't think that will happen in this case because Japanese managers are paid less than their western counterparts and are probably given less incentive to increase shareholder value. Instead, they probably are motivated to keep their empire as large as possible. As I said earlier, the bulk of the value of the parent company lies in techno quartz, therefore, I think the parent company will keep owning it.
DeleteAs for filing information I use ibkr.com which I highly recommend because it offers great value at a very reasonable price. Another site I use just for financial info is: https://www.kaijinet.com/jpexpress/
Thank you for the information. It is my understanding that Japanese companies/corporate officer mentality is different compared to most western countries, so I wasn't sure how they tend to handle this kind of thing. I guess the 35% was floated simply as a way to get some cash for the parent company while still maintaining control.
ReplyDelete