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Japan’s large contracting companies have been held back by COVID with delays on construction sites, sales and project deliveries and have been underperforming the main indexes since 2017.
However, the tide seem to be turning and TAISEI Corp, one of the five largest contracting company and the only employee-owned contractor delivered positive results today, sending the stock sharply higher and marking the BUY signal we have been waiting for.
BUY TAISEI CORP 1801 JP @ JPY 3’800
Taisei Corporation is a general contractor operating in Japan and overseas.
The Company builds residential, commercial, and institutional buildings such as condominiums and single-family houses. Taisei also performs civil engineering works for roads.
Taisei operates three core business segments:
Construction Contracts, which generates 62% of its total revenue and constructs buildings and houses;
Civil Engineering (29% of revenue);
Real Estate Development (9% of revenue), which resales and leases land and buildings.
Headquartered in Japan, Taisei has branch offices in Tokyo, Osaka, Nagoya, Fukuoka, Sapporo, Sendai, Hiroshima, Yokohama, Niigata, Takamatsu, Chiba, Saitama, Kobe, and Kyoto. International locations reside in Taipei, the Middle East (Dubai and Doha), the US (California), Kuala Lumpur, Jakarta, India (New Delhi), Pakistan (Islamabad), Vietnam (Hanoi and Hochiminh City), Sri Lanka (Colombo), North Africa (Egypt), Thailand (Bangkok), and Istanbul.
Tasei’s revenues and profits have been rising over the past few years as Japan’s economic growth and demand for construction services has picked up. It was affected by COVID in 2020 but is now recovering strongly.
Taisei revenues and profits have fallen in fiscal year ending on March 2021 by respectively -11 % and -22 %. However, Revenues should reach a new all-time high this coming year with profits climbing back towards the 2019 levels.
Taisei today reported operating income for the third quarter that beat the average analyst estimate.
Operating income 37.85 billion yen, +14% y/y, against estimates of 33.43 billion yen
Net income 26.51 billion yen, +11% y/y, against estimates of 25.17 billion yen
Analysts remain prudent on the company and its prospects, however, target prices are being raised for the company.
Valuation is fair in absolute terms and the company boasts an attractive 14.6 % return on equity and a low 7.2 x Price earnings ratio.
The real investment case rests on the historically low valuation of the company at the moment, on both P/Earnings and Price to Book ratios.
Considering the global recovery ahead, these low valuation ratios are unusual and do not reflect the recovery potential of the company and of the sector.
Taisei shares have been in a bear market since 2017, mainly due to a valuation contraction as investors underweighted what was deemed to be an unattractive sector overall.
Since, March 2020 the stock has been trading sideways marking an important consolidation after the 2017, 2019 bear market with a clear trend ending washout in March 2020.
Today’s price action marks an important BUY signal and the first major break out of the downtrend and consolidation triangles in place.
We see the current price levels as an attractive entry point for long term global portfolios wanting to diversify into a lagging, but promising sector of the Japanese stock market.
We added it today to our Model Portfolio
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