Description

JWT has enormous hidden real estate assets that are not apparent on its balance sheet or in its share price. Founded in 1896, JWT is the only vertical wool-related textile manufacturer in Japan. The Company focuses on school and business uniforms, business attire and a variety of other apparel and non-apparel goods. JWT has, to quote the company, “an overwhelming dominance in the nation’s uniform market” and has over a 50% market share in school uniforms. The wool business is a cash generator for the company, producing about ¥2 billion in EBIT annually. The wool business has been growing recently along with the resurgence of Japan’s economy. They have done well despite Japan having no wool import duty which makes competing with China difficult. To better compete, JWT has moved 10% of its fabric business (soon to be 15%), 35% of its yarn business and 33% of its industrial textiles/carpets/bedclothes business to China over the past few years.

But what is most interesting about JWT is its real estate portfolio which is held on its books at cost (despite some of the property being acquired as long as 110 years ago). This land appears to be extremely valuable but is on the company’s books for next to nothing. Recently the company has decided to redevelop its landholdings. JWT has converted some of its real estate assets out of the wool business and into shopping centers, sports facilities, bowling alleys, spas, nursing care centers and other uses. These facilities are all leased out to third party operators and not run by the company. Though the company does not provide an estimate for its land values, they are very forthcoming on their holdings, providing details on location, size and book values and have indicated that public surveys would be helpful in valuing the land. Macquarie Securites has done an in-depth analysis of JWT’s landholdings by examining the government’s assessment of the value of the property (for tax purposes) and by having discussions with the company’s management team who has confirmed Macquarie’s valuation. Their estimate is that the land is worth ¥160 billion in excess of what is currently on the books versus the current market cap of ¥86 billion).

As of the end of fiscal 2005, the company had a book value of ¥76 billion, which included ¥40 billion of cash and securities, net of debt (cash and securities, net of debt are equal to nearly 50% of the current market cap). Since the wool business has been profitable for many years and has shown growth recently and the balance sheet is highly liquid, valuing the company at book value plus the excess value of its real estate seems reasonably conservative. This pegs JWT’s value at ¥238 billion or ¥2,689 per share which is 177% above the current price. Note that I have not assumed the company pays taxes on the sale of the land. This is because management has clearly indicated they intend never to sell the land, but instead plan to develop and monetize the land through leasing arrangements. Keep in mind that investors in JWT are not only buying land at a deeply discounted price but that land values in Japan are down 50% - 80% from peak levels after 15 years of price declines which have just recently begun to reverse over the past year or so.

It is theoretically possible (though one can’t predict the future state of Japanese tax law) that JWT may be able to transform into a REIT one day. By way of comparison, JWT’s real estate assets (after stripping out earnings from other assets) appear to be yielding about 13% - 15% or so after tax at the current price of JWT’s shares. Public REITs in Japan are currently yielding closer to 3%.

JWT is not controlled by any insiders or third parties. The largest shareholder owns less than 5% of the company.

Catalyst

The catalyst is for the underlying value of JWT’s real estate holdings to become more broadly recognized. This could happen through the issuance of research reports from brokerage firms, the announcement of a large position taken by potential suitors of the company or even perhaps a takeover bid. With large private equity firms such as Texas Pacific Group, Carlyle and Steel Partners having an increasingly large presence in Japan, this seems to be a reasonable possibility.