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Fukuda Denshi 6960
October 27, 2020 - 2:24pm EST by
bdad
2020 2021
Price: 7,220.00 EPS 0 0
Shares Out. (in M): 15 P/E 0 0
Market Cap (in $M): 1,045 P/FCF 0 0
Net Debt (in $M): -662 EBIT 0 0
TEV (in $M): 383 TEV/EBIT 0 0

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Description

Investment Overview:
Fukuda Denshi (6960.JP) is an interesting long. The Company may end up being dead money/value trap but the value here is hard to ignore. The Company has top three market share in several oligopolistic businesses in Japan with decent secular tailwinds driven by an aging population. More importantly, financial statements which aren’t entirely straightforward and the general lack of sell side coverage of the
name has created a tremendous dislocation in value leaving a bargain hiding in plain sight. On a properly adjusted basis, the stock trades at roughly 1/3 the multiple of its nearest peers and the stock could double and still be cheap. This situation is begging for an activist/constructivist approach since there are some easy fixes to bridge the gap with peers.
NB: Company disclosure is light so the discussion of the business below is evolving
 
Financial Summary:

Valuation Adjustments:
• The valuation adjustments are an important part of the story here. The Company has 19.6MM shares
outstanding but 4.5MM of those are in the form of treasury stock (ie the Company is their own
largest shareholder). Bloomberg/CapIQ/sell-side don’t capture this dynamic and use 19.6MM shares
as shares outstanding when calculating market cap/EV when the real number should be ~15.1MM so
right off the bat, multiples are overstated by ~25%
• The Company also has ~24Bn JPY in investment securities and insurance funds (which, despite being
categorized as a long term asset is basically an investment equivalent). These line items just represent
another place the Company has parked excess cash and they can be easily liquidated but this value
isn’t captured by data sources/analysts either.
 
Company Description:
Fukuda Denshi manufacturers, distributes and sells electronic medical equipment. The company was
founded in 1939 and developed the first electrocardiograph in Japan (and still run by the founders family
who owns 20+% of the Company). The Company is mainly focused on the Japanese medical device
market and has little international presence. The Company has posted incredibly stable performance the
past 10 years growing revenue at a 4% CAGR with the worst year being a 1.6% decline during GFC.
 
 
Segment Description:
The Company operates in four main segments and unlike many other Japanese companies, they have
avoided the temptation to diversify into unrelated industries. The Company is focused on healthcare
equipment in Japan which ought to have a decent secular tailwind giving aging demographics and
increased incidences
 
• Medical Treatment Equipment Segment (~38% of revenue and ~51% of EBIT) which mainly handles
defibrillators, ventilators, pacemakers, catheters, and business of renting medical equipment for
home treatment.
▪ The largest product in the segment is home respiratory care which is ~30% of
segment sales.
• In home respiratory equipment, Teijin has ~50% share while Fukuda Denshi
has ~25% range and Philips has ~10%.
▪ In defibrillators they and Nihon Koden each have ~30% share
▪ In CPAP, Teijin Philips each have ~30% share while Fukuda Denshi has ~20%.
o This is the highest margin segment in the Company with EBIT margins ~13%. The home care
segments (respiratory and CPAP, primarily) have particularly attractive tailwinds because
there is a 1:1 patient attach ratio for home equipment unlike laboratory or diagnostic
equipment
• Physiological Diagnostic Equipment Segment (~30% of revenue and ~21% of EBIT) which mainly
produces electrocardiographs, ultrasound diagnostic imaging systems and blood-cell counters.
o The Company was the first company in Japan to sell EKG’s which they introduced in 1939.
EKG’s currently represent the largest contributor to segment sales (~half of segment sales)
▪ They have >60% market share in EKGs with Nihon Koden the 2nd largest player at ~25% share.
o Next largest contributor to the segment is blood cell diagnostics which accounts for <20% of
segment sales
o LDD portion of segment sales are ultrasonic diagnostic devices
• Patient Monitoring Equipment Segment (~7% of revenue and ~6% of EBIT) produces patient monitors
to monitor patient heart rates/vitals/etc.
o Nihon Koden has ~37% share v Fukuda Denshi ~30%.
• Consumables and Other Products Segment (~24% of revenue and ~21% of EBIT) mainly handles
consumables used for devices handled by the above segments as well as for maintenance and service
 
 
 
Valuation:
 
 
 
 
 
 
 
 
Risks:
• Governance is the big one here. Steel Partners made a run at the Company in ’06 and encouraged the
Company to increase their dividend from 40 JPY to 140 JPY. Management didn’t care for this idea (or
the presence of an activist) and they implemented a poison pill (although they did increase dividend
to 80 JPY to get Steel off their back)
o The main mitigant here is the fact that the Chairman and his family own 23%+ of the
Company and it represents the majority of their net worth so they presumably should care
about the stock price.
o The Company has periodically bought back stock (notably in the ’10-’14 timeframe when they
bought back almost 20% of FDSO (presumably from Steel) but they didn’t cancel the stock
following the buyback which gave rise to the large Treasury stock balance we see today.
• Medical products pricing is regulated by the government which has tended to try to keep a cap on
pricing. The Company is constantly trying to reduce costs to compensate for this, but there is no
indication that there will be an acceleration in pricing pressure.
 
 
Fukuda Denshi and Nihon
Koden are similar companies
and the slight puts/takes
between their two business
models isn’t enough to justify
such a variance in valuation
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

None. This could quite plausibly be dead money/

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