Daiseki / 9793
COVERAGE INITIATED ON: 2010.06.18 LAST UPDATE: 2019.10.01
Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.
Research Coverage Report by Shared Research Inc. Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.
Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------7 Monthly trends ------7 Quarterly trends and results ------8 Company forecasts for FY02/20 ------16 Outlook ------27 Business ------32 Business description ------32 Strengths and weaknesses ------40 Market and value chain ------41 Strategy ------45 Historical performance and financial statements ------46 Income statement ------46 Balance sheet ------49 Cash flow statement ------50 Historical performance ------51 Other information ------63 News------63 History ------64 Top management ------65 Employees ------65 Major shareholders ------66 Dividends and shareholder returns ------66 Investor relations ------67 Company profile ------67
02/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Executive summary
Business overview
◤ Daiseki is an environmental specialist company whose main focus is industrial waste recycling. The parent company's primary business is intermediate processing of liquid wastes (waste oil, wastewater, sludge) and their separation into reusable components (such as recycled heavy oil) that can then be resold. Subsidiaries include Daiseki Eco. Solution Co., Ltd. (TSE1: 1712), in which Daiseki holds a 54% stake, Daiseki MCR, and System Kikou. In FY02/19, Daiseki Eco. Solution, whose main businesses are soil decontamination and plasterboard recycling, generated JPY32.1bn in sales; Daiseki MCR, whose main business is refining and selling lead recovered from used batteries, reported JPY14.2bn in sales; and System Kikou, which provides cleanup services for large oil tanks and also does industrial piping installation and maintenance, reported JPY2.2bn in sales. The parent company's operating profit margin of 25.8% is high, an indication of its competitive strength as an environmental specialist company.
◤ Just as Daiseki group companies have increasingly embraced ESG initiatives, so too has there been a steady increase in societal demand in Japan for environmental protection and growing environmental awareness among the many domestic manufacturers that comprise the bulk of Daiseki's customer base. Japan's environmental regulations are getting stricter over time, especially in the area of industrial waste treatment. As an environmental specialist company whose main focus is industrial waste recycling, Daiseki has the expertise needed to assure proper treatment of industrial waste and, as it has gained the trust of more and more client companies, has also steadily increased its share of the industrial waste treatment market.
◤ In June 2018, the company unveiled its long-term management vision. Dubbed Vision 2030, the plan is based on the company's philosophy of contributing to society by creating a better environment, and introduces specific targets that are aligned with the sustainable development goals set forth in the United Nation's 2030 Agenda for Sustainable Development (adopted in September 2015). Under Vision 2030, the company is targeting FY02/30 sales of JPY150.0bn (roughly a 3.0-fold increase over FY02/18), operating profit of JPY25.0bn (roughly a 2.8-fold increase over FY02/18), and an ROE of 15% (versus 9.9% in FY02/18).
Earnings trends
◤ For FY02/19, Daiseki reported full-year consolidated sales of JPY51.3bn (+4.3% YoY), an operating profit of JPY9.1bn (+3.8% YoY), and net income attributable to owners of the parent of JPY6.1bn (+4.7% YoY). This represented a new record high for earnings. Gains at parent company drove overall results. Aided by increases in waste oil processing volumes, parent operating profit rose 15.7% YoY to JPY8.3bn. This offset lower earnings at subsidiaries, including Daiseki Eco. Solution, which saw operating profit decline 33.0% YoY to JPY898mn as it was hit by falling prices for soil decontamination work, and falling earnings at Daiseki MCR, which reported an operating loss of JPY205mn (versus year-earlier profit of JPY64mn).
◤ For FY02/20, the company is forecasting consolidated sales of JPY53.5bn (+4.3% YoY) and an operating profit of JPY10.1bn (+10.9% YoY). In addition to higher earnings at the parent, which is expected to continue benefiting from increased demand for waste oil processing and market share gains, the company is expecting higher earnings at Daiseki Eco. Solution as pricing for soil decontamination work bottoms out; it also sees Daiseki MCR moving back into the black after logging operating losses in FY02/19 as regulatory changes allow it to procure used lead batteries more cheaply.
◤ Under its medium-term business plan, the company is targeting FY02/22 consolidated sales of JPY58.5bn, an operating profit of JPY11.7bn, and ROE of 10.1%. The projected gains reflect the company's expectations that it will be able to continue increasing industrial waste processing volumes as it picks up market share, and slow-but-steady growth in sales and earnings at subsidiaries.
Strengths and weaknesses
◤ Shared Research sees Daiseki as having three main strengths. First, its many years of experience and reliable reputation as a listed company; second, management's pragmatic focus on medium-term earnings growth; and third, the parent company's
03/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
focus on liquid waste processing. On the flip side, we also see three notable weaknesses. First, its exposure to swings in domestic mining and manufacturing production; second, the long lead time needed for the permitting of new plant construction and expansion of existing plants; and third, the limited number of attractive opportunities for mergers and acquisitions. (For more detailed discussion, see "Strengths and weaknesses" section later in this report.)
04/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Key financial data
Income statement FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 51,313 53,500 YoY 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 4.3% 4.3% Gross profit 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,189 16,200 YoY 9.6% 8.4% -2.2% 19.7% 5.0% 1.4% -5.5% 17.1% 4.9% 6.7% GPM 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 29.6% 30.3% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,107 10,100 YoY 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 23.3% 3.8% 10.9% OPM 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 17.7% 18.9% Recurring profit 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 9,199 10,200 YoY 12.1% 5.6% -5.9% 33.2% 0.5% 7.0% -9.1% 23.3% 3.2% 10.9% RPM 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% 17.9% 19.1% Net income 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,110 6,700 YoY 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4% 41.2% 4.7% 9.7% Net margin 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% 11.9% 12.5% Per share data (split-adjusted; JPY) Shares issued (year-end; '000) 45,124 45,124 45,125 45,125 45,125 45,125 45,125 43,000 43,000 - EPS 69.2 70.9 67.2 87.5 89.6 85.8 95.8 136.5 142.9 156.7 Dividend per share 20.0 20.0 21.0 22.0 24.0 28.0 29.0 40.0 46.0 46.0 Book value per share 977 1,027 1,076 1,144 1,214 1,261 1,319 1,427 1,521 - Balance sheet (JPYmn) Cash and cash equivalents 17,917 19,723 20,174 24,416 26,763 28,830 27,256 28,183 31,535 Total current assets 26,191 28,277 28,477 34,773 38,554 40,194 39,240 39,849 42,179 Tangible fixed assets 28,243 28,831 30,991 29,798 32,122 30,155 33,163 37,354 43,345 Investments and other assets 9,094 9,463 9,595 7,977 7,699 6,267 8,052 9,053 11,054 Intangible fixed assets 2,527 2,247 1,967 1,690 1,422 1,021 938 850 786 Total assets 54,435 57,108 59,468 64,571 70,677 70,350 72,403 77,203 85,524 Accounts payable 2,403 2,650 2,651 3,296 3,811 3,521 3,877 3,420 3,698 Short-term debt 1,120 845 1,372 860 1,500 1,139 2,099 449 1,695 Total current liabilities 6,932 7,300 7,429 8,075 10,485 9,147 9,228 8,814 12,197 Long-term debt 353 182 10 - - 725 425 500 962 Total fixed liabilities 1,324 1,279 1,203 1,360 1,573 1,919 1,666 1,755 2,369 Total liabilities 8,257 8,580 8,632 9,435 12,058 11,067 10,895 10,570 14,567 Net assets 46,177 48,528 50,835 55,136 58,618 59,283 61,508 66,633 70,957 Total interest-bearing debt 1,473 1,027 1,382 860 1,500 1,864 2,524 949 2,657 Cash flow statement (JPYmn) Cash flows from operating activities 5,476 4,922 5,041 6,093 5,241 7,509 5,813 9,938 9,580 Cash flows from investing activities -3,324 -1,709 -6,019 933 -2,493 -2,829 -4,452 -6,237 -8,396 Cash flows from financing activities -1,258 -1,396 -577 -841 -484 -3,702 -1,934 -2,957 -347 Financial ratios ROA (RP-based) 10.7% 10.6% 9.5% 11.9% 11.0% 11.3% 10.1% 11.9% 11.3% ROE 7.3% 7.1% 6.4% 7.9% 7.6% 7.0% 7.4% 9.9% 9.7% Equity ratio 80.8% 81.0% 81.5% 79.8% 77.3% 77.7% 77.9% 79.0% 76.0% Source: Shared Research based on company data
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Recent updates
Highlights
On October 1, 2019, Daiseki Co., Ltd. announced earnings results for 1H FY02/20; see the results section for details.
On September 18, 2019, the company announced revisions to 1H and full-year FY02/20 results forecasts at a consolidated subsidiary Daiseki Eco. Solution Co., Ltd.
Revisions to 1H FY02/20 consolidated earnings forecasts
▷ Sales: JPY7.0bn (previously JPY7.0bn) ▷ Operating profit: JPY645mn (JPY372mn) ▷ Recurring profit: JPY675mn (JPY383mn) ▷ Net income attributable to owners of the parent: JPY400mn (JPY219mn) ▷ EPS: JPY23.79 (JPY13.04)
Revisions to full-year FY02/20 consolidated earnings forecasts
▷ Sales: JPY14.2bn (previously JPY14.7bn) ▷ Operating profit: JPY1.0bn (JPY900mn) ▷ Recurring profit: JPY1.1bn (JPY910mn) ▷ Net income attributable to owners of the parent: JPY630mn (JPY520mn) ▷ EPS: JPY37.48 (JPY30.95)
Reasons for the revisions In 1H FY02/20, in the soil contamination research and cleanup business the company focused on high value-added projects such as those involving more complex soil treatment and those in which construction and processing are packaged together. In addition, the company strived for higher operation rates and cost reductions at its Yatomi and Yokohama-Ebisu recycling centers. The operation rate of the Yatomi Recycling Center was up 15% YoY, and that of the Yokohama-Ebisu Recycling Center (operational from January 2019) largely trended along forecasts. As a result, sales closely followed expectations while profitability improved, leading the company to anticipate profits rising above forecasts. Although the company expects overall performance to be strong from Q3 on, it sees some uncertainty from factors such as project delays.
Taking all of the above points into consideration, the company realized earnings would likely surpass both the 1H and full-year forecasts announced in April 2019. Parent company forecasts were unchanged since the revisions were small enough not to significantly impact parent company results.
On July 12, 2019, Shared Research updated the report following interviews with the company.
On July 1, 2019, the company announced earnings results for Q1 FY02/20.
For previous releases and developments, please refer to the News and topics section.
06/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Trends and outlook
Monthly trends
Daiseki Co. monthly sales, year-on-year performance (JPYmn) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY02/10 Act. 1,407 1,405 1,479 1,510 1,580 1,572 1,539 1,698 1,870 1,947 1,670 1,526 19,209 FY02/11 Act. 1,815 1,821 1,812 1,745 1,846 1,911 1,817 1,832 1,976 1,986 1,578 1,712 21,856 FY02/12 Act. 2,046 1,986 1,996 2,319 2,251 2,083 1,928 1,972 1,891 2,034 1,723 1,778 24,011 FY02/13 Act. 2,100 2,112 2,176 1,969 1,938 2,104 1,955 1,988 1,984 2,066 1,696 1,715 23,808 FY02/14 Act. 2,114 2,042 2,130 2,041 2,158 2,170 2,019 2,168 2,139 2,283 1,852 1,953 25,074 FY02/15 Act. 2,418 2,252 2,151 2,192 2,283 2,271 2,252 2,299 2,149 2,334 1,912 1,941 26,459 FY02/16 Act. 2,351 2,323 2,147 2,308 2,304 2,230 2,103 2,292 2,023 2,247 1,787 1,895 26,016 FY02/17 Act. 2,166 2,125 2,133 2,129 2,275 2,226 2,219 2,222 2,140 2,278 1,870 1,977 25,746 FY02/18 Act. 2,497 2,360 2,375 2,367 2,389 2,452 2,328 2,455 2,442 2,631 2,173 2,304 28,778 FY02/19 Act. 2,742 2,525 2,650 2,665 2,665 2,795 2,683 2,850 2,768 2,879 2,403 2,497 32,127 FY02/20Act.2,9872,8572,8162,6492,9002,808 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY02/10 Act. -39.5% -40.1% -36.6% -40.2% -32.8% -33.0% -30.0% -24.9% -16.0% -1.1% 28.4% 6.9% -25.0% FY02/11 Act. 29.0% 29.6% 22.5% 15.6% 16.8% 21.6% 18.1% 7.9% 5.7% 2.0% -5.5% 12.2% 13.8% FY02/12 Act. 12.7% 9.1% 10.2% 32.9% 21.9% 9.0% 6.1% 7.6% -4.3% 2.4% 9.2% 3.9% 9.9% FY02/13 Act. 2.6% 6.3% 9.0% -15.1% -13.9% 1.0% 1.4% 0.8% 4.9% 1.6% -1.6% -3.5% -0.8% FY02/14 Act. 0.7% -3.3% -2.1% 3.7% 11.4% 3.1% 3.3% 9.1% 7.8% 10.5% 9.2% 13.9% 5.3% FY02/15 Act. 14.4% 10.3% 1.0% 7.4% 5.8% 4.7% 11.5% 6.0% 0.5% 2.2% 3.2% -0.6% 5.5% FY02/16 Act. -2.8% 3.2% -0.2% 5.3% 0.9% -1.8% -6.6% -0.3% -5.9% -3.7% -6.5% -2.4% -1.7% FY02/17 Act. -7.9% -8.5% -0.7% -7.8% -1.3% -0.2% 5.5% -3.1% 5.8% 1.4% 4.6% 4.3% -1.0% FY02/18 Act. 15.3% 11.1% 11.3% 11.2% 5.0% 10.2% 4.9% 10.5% 14.1% 15.5% 16.2% 16.5% 11.8% FY02/19 Act. 9.8% 7.0% 11.6% 12.6% 11.6% 14.0% 15.2% 16.1% 13.3% 9.4% 10.6% 8.4% 11.6% FY02/20 Act. 8.9% 13.1% 6.3% -0.6% 8.8%0.5% Daiseki Co. monthly gross profit margin Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Total FY02/10 Act. 35.5% 35.4% 34.6% 34.1% 35.1% 35.2% 37.0% 36.5% 33.3% 32.3% 30.4% 31.0% 34.2% FY02/11 Act. 39.8% 38.2% 38.9% 38.5% 38.6% 34.8% 37.1% 39.4% 34.8% 36.1% 33.2% 30.9% 36.8% FY02/12 Act. 39.3% 36.8% 34.6% 32.1% 35.4% 34.2% 36.3% 37.7% 36.8% 36.2% 33.4% 28.7% 35.2% FY02/13 Act. 38.7% 38.5% 35.9% 35.0% 33.7% 34.1% 35.7% 35.6% 35.3% 33.8% 32.3% 25.9% 34.8% FY02/14 Act. 36.4% 37.1% 37.4% 36.6% 35.6% 36.5% 37.1% 36.8% 35.1% 35.9% 32.4% 29.6% 35.7% FY02/15 Act. 38.2% 37.5% 36.9% 39.2% 37.6% 37.7% 36.2% 36.5% 37.9% 36.1% 33.2% 30.9% 36.7% FY02/16 Act. 36.0% 36.5% 35.5% 35.5% 35.5% 34.4% 34.4% 36.4% 34.1% 35.2% 31.1% 31.7% 34.9% FY02/17 Act. 37.3% 37.5% 36.8% 36.6% 37.6% 35.8% 36.8% 38.2% 37.2% 37.7% 33.5% 33.3% 36.6% FY02/18 Act. 39.0% 39.3% 40.0% 38.6% 38.4% 37.1% 36.4% 39.6% 36.8% 39.0% 33.2% 31.4% 37.5% FY02/19 Act. 39.7% 37.9% 38.8% 39.5% 38.4% 38.0% 38.8% 39.0% 37.7% 38.9% 33.5% 32.6% 37.9% FY02/20Act.40.0%36.6%37.5%39.2%39.6%40.7% Source: Shared Research based on company data Note: Includes gross profit on soil contamination cleanup sales to Daiseki Eco. Solution; GPM tends to decrease in months when sales are high.
Daiseki Co. sales and GPM
3,000 42%
2,800 40%
2,600 38% 2,400 36% 2,200 34% 2,000
1,800 32%
FY02/17 FY02/18 FY02/19 FY02/20 FY02/17 FY02/18 FY02/19 FY02/20 1,600 30% (JPYmn) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Source: Shared Research based on company data
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Quarterly trends and results
Cumulative FY02/18 FY02/19 FY02/20 FY02/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2% of FYFY Est. Sales 12,720 24,916 36,314 49,185 12,398 26,249 38,899 51,313 13,557 26,892 50.3% 53,500 YoY 9.5% 9.0% 7.6% 11.2% -2.5% 5.3% 7.1% 4.3% 9.3% 2.4% 4.3% Gross profit 3,744 7,314 10,781 14,484 3,829 7,717 11,629 15,189 4,329 8,535 52.7% 16,200 YoY 18.6% 16.2% 13.4% 17.1% 2.3% 5.5% 7.9% 4.9% 13.1% 10.6% 6.7% GPM 29.4% 29.4% 29.7% 29.4% 30.9% 29.4% 29.9% 29.6% 31.9% 31.7% 30.3% SG&A expenses 1,443 2,851 4,262 5,707 1,485 3,012 4,561 6,082 1,561 3,063 50.2% 6,100 YoY 9.2% 8.8% 7.6% 8.8% 2.9% 5.6% 7.0% 6.6% 5.1% 1.7% 0.3% SG&A ratio 11.3% 11.4% 11.7% 11.6% 12.0% 11.5% 11.7% 11.9% 11.5% 11.4% 11.4% Operating profit 2,300 4,462 6,519 8,777 2,343 4,704 7,067 9,107 2,767 5,471 54.2% 10,100 YoY 25.3% 21.4% 17.5% 23.3% 1.9% 5.4% 8.4% 3.8% 18.1% 16.3% 10.9% OPM 18.1% 17.9% 18.0% 17.8% 18.9% 17.9% 18.2% 17.7% 20.4% 20.3% 18.9% Recurring profit 2,348 4,554 6,611 8,914 2,356 4,743 7,159 9,199 2,812 5,554 54.5% 10,200 YoY 26.6% 22.5% 17.8% 23.3% 0.3% 4.2% 8.3% 3.2% 19.4% 17.1% 10.9% RPM 18.5% 18.3% 18.2% 18.1% 19.0% 18.1% 18.4% 17.9% 20.7% 20.7% 19.1% Net income 1,548 2,960 4,353 5,833 1,583 3,074 4,692 6,110 1,811 3,564 53.2% 6,700 YoY 55.0% 44.7% 38.2% 41.2% 2.3% 3.9% 7.8% 4.7% 14.4% 15.9% 9.7% Net margin 12.2% 11.9% 12.0% 11.9% 12.8% 11.7% 12.1% 11.9% 13.4% 13.3% 12.5% Quarterly FY02/18 FY02/19 FY02/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Sales 12,720 12,196 11,398 12,871 12,398 13,851 12,650 12,414 13,557 13,335 YoY 9.5% 8.4% 4.7% 22.8% -2.5% 13.6% 11.0% -3.6% 9.3% -3.7% Gross profit 3,744 3,570 3,467 3,703 3,829 3,888 3,912 3,560 4,329 4,206 YoY 18.6% 13.8% 7.9% 29.5% 2.3% 8.9% 12.8% -3.9% 13.1% 8.2% GPM 29.4% 29.3% 30.4% 28.8% 30.9% 28.1% 30.9% 28.7% 31.9% 31.5% SG&A expenses 1,443 1,408 1,411 1,445 1,485 1,527 1,549 1,521 1,561 1,502 YoY 9.2% 8.4% 5.4% 12.3% 2.9% 8.5% 9.8% 5.3% 5.1% -1.6% SG&A ratio 11.3% 11.5% 12.4% 11.2% 12.0% 11.0% 12.2% 12.3% 11.5% 5.6% Operating profit 2,300 2,162 2,057 2,258 2,343 2,361 2,363 2,040 2,767 2,704 YoY 25.3% 17.5% 9.8% 43.6% 1.9% 9.2% 14.9% -9.7% 18.1% 14.5% OPM 18.1% 17.7% 18.0% 17.5% 18.9% 17.0% 18.7% 16.4% 20.4% 20.3% Recurring profit 2,348 2,206 2,057 2,303 2,356 2,387 2,416 2,040 2,812 2,742 YoY 26.6% 18.4% 8.7% 42.3% 0.3% 8.2% 17.5% -11.4% 19.4% 14.9% RPM 18.5% 18.1% 18.0% 17.9% 19.0% 17.2% 19.1% 16.4% 20.7% 20.6% Net income 1,548 1,412 1,393 1,480 1,583 1,491 1,618 1,418 1,811 1,753 YoY 55.0% 35.0% 26.1% 50.7% 2.3% 5.6% 16.2% -4.2% 14.4% 17.6% Net margin 12.2% 11.6% 12.2% 11.5% 12.8% 10.8% 12.8% 11.4% 13.4% 13.1% Source: Shared Research based on company data
08/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
By company FY02/18 FY02/19 FY02/20 FY02/20 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 % of FY FY Est. Total sales (consolidated) 12,720 24,916 36,314 49,185 12,398 26,249 38,899 51,313 13,557 26,892 50.3% 53,500 YoY 9.5% 9.0% 7.6% 11.2% -2.5% 5.3% 7.1% 4.3% 9.3% 2.4% 4.3% Daiseki Co. (parent) 7,232 14,441 21,668 28,778 7,918 16,044 24,347 32,127 8,661 17,020 51.3% 33,170 YoY 12.6% 10.6% 10.4% 11.8% 9.5% 11.1% 12.4% 11.6% 9.4% 6.1% 3.2% % of consolidated sales 56.9% 58.0% 59.7% 58.5% 63.9% 61.1% 62.6% 62.6% 63.9% 63.3% 62.0% Daiseki Eco. Solution 3,984 7,466 10,325 14,926 3,332 7,806 10,893 14,193 3,524 7,032 49.7% 14,150 YoY -4.0% 0.5% -5.9% 3.9% -16.4% 4.6% 5.5% -4.9% 5.8% -9.9% -0.3% % of consolidated sales 31.3% 30.0% 28.4% 30.3% 26.9% 29.7% 28.0% 27.7% 26.0% 26.1% 26.4% Hokuriku Daiseki 195 386 586 785 226 430 641 848 207 394 45.5% 865 YoY 19.6% 18.4% 19.1% 20.2% 15.9% 11.4% 9.4% 8.0% -8.4% -8.4% 2.0% % of consolidated sales 1.5% 1.5% 1.6% 1.6% 1.8% 1.6% 1.6% 1.7% 1.5% 1.5% 1.6% Daiseki MCR 614 1,264 2,069 2,846 741 1,519 2,184 2,848 726 1,462 50.2% 2,910 YoY 8.7% 21.7% 33.1% 32.4% 20.7% 20.2% 5.6% 0.1% -2.0% -3.8% 2.2% % of consolidated sales 4.8% 5.1% 5.7% 5.8% 6.0% 5.8% 5.6% 5.6% 5.4% 5.4% 5.4% System Kikou 888 1,727 2,222 2,627 406 916 1,527 2,229 689 1,450 55.8% 2,600 YoY 75.1% 24.2% 29.7% 27.5% -54.3% -47.0% -31.3% -15.2% 69.7% 58.3% 16.6% % of consolidated sales 7.0% 6.9% 6.1% 5.3% 3.3% 3.5% 3.9% 4.3% 5.1% 5.4% 4.9% Eliminations -194 -368 -557 -778 -225 -467 -694 -933 -252 -467 -195 Operating profit (consolidated) 2,300 4,462 6,519 8,777 2,343 4,704 7,067 9,107 2,767 5,471 54.2% 10,100 YoY 25.3% 21.4% 17.5% 23.3% 1.9% 5.4% 8.4% 3.8% 18.1% 16.3% 10.9% OPM 18.1% 17.9% 18.0% 17.8% 18.9% 17.9% 18.2% 17.7% 20.4% 200.6% 18.9% Daiseki Co. (parent) 1,931 3,782 5,581 7,170 2,126 4,291 6,521 8,294 2,304 4,647 52.4% 8,870 YoY 22.7% 19.3% 16.3% 16.8% 10.1% 13.5% 16.8% 15.7% 8.4% 8.3% 6.9% OPM 26.7% 26.2% 25.8% 24.9% 26.9% 26.7% 26.8% 25.8% 26.6% 27.3% 26.7% Daiseki Eco. Solution 345 538 693 1,339 273 597 728 898 324 641 61.7% 1,040 YoY -28.0% -38.3% -44.4% -11.2% -20.8% 11.1% 5.0% -33.0% 18.7% 7.4% 15.8% OPM 8.7% 7.2% 6.7% 9.0% 8.2% 7.6% 6.7% 6.3% 9.2% 9.1% 7.3% Hokuriku Daiseki 12 25 40 48 19 38 50 68 20 38 54.3% 70 YoY 9.1% 19.0% 25.0% 20.0% 58.3% 52.0% 25.0% 41.7% 5.3% - 2.9% OPM 6.2% 6.5% 6.8% 6.1% 8.4% 8.8% 7.8% 8.0% 9.7% 9.6% 8.1% Daiseki MCR 38 -11 10 64 6 -116 -175 -205 28 11 5.5% 199 YoY -----84.2%---366.7%- - OPM 6.2% -0.9% 0.5% 2.2% 0.8% -7.6% -8.0% -7.2% 3.9% 0.8% 6.8% System Kikou -12 159 243 218 -64 -72 -11 114 106 165 81.7% 202 YoY - 381.8% ------47.7%-- 77.2% OPM -1.4% 9.2% 10.9% 8.3% -15.8% -7.9% -0.7% 5.1% 15.4% 11.4% 7.8% Eliminations -14 -31 -49 -64 -18 -33 -46 -62 -16 -33 -281 By company FY02/18 FY02/19 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Total sales (consolidated) 12,720 12,196 11,398 12,871 12,398 13,851 12,650 12,414 13,557 13,335 YoY 9.5% 8.4% 4.7% 22.8% -2.5% 13.6% 11.0% -3.6% 9.3% -3.7% Daiseki Co. (parent) 7,232 7,209 7,227 7,110 7,918 8,126 8,303 7,780 8,661 8,359 YoY 12.6% 8.7% 10.1% 16.1% 9.5% 12.7% 14.9% 9.4% 9.4% 2.9% % of consolidated sales 56.9% 59.1% 63.4% 55.2% 63.9% 58.7% 65.6% 62.7% 63.9% 62.7% Daiseki Eco. Solution 3,984 3,482 2,859 4,601 3,332 4,475 3,086 3,300 3,524 3,508 YoY -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 8.0% -28.3% 5.8% -21.6% % of consolidated sales 31.3% 28.6% 25.1% 35.8% 26.9% 32.3% 24.4% 26.6% 26.0% 26.3% Hokuriku Daiseki 195 191 200 199 226 204 211 207 207 187 YoY 19.6% 17.2% 20.5% 23.6% 15.9% 6.8% 5.5% 4.0% -8.4% -8.3% % of consolidated sales 1.5% 1.6% 1.8% 1.5% 1.8% 1.5% 1.7% 1.7% 1.5% 1.4% Daiseki MCR 614 650 805 777 741 778 665 664 726 736 YoY 8.7% 37.1% 56.3% 30.4% 20.7% 19.7% -17.4% -14.5% -2.0% -5.4% % of consolidated sales 4.8% 5.3% 7.1% 6.0% 6.0% 5.6% 5.3% 5.3% 5.4% 5.5% System Kikou 888 839 495 405 406 510 611 702 689 761 YoY 75.1% -5.1% 53.7% 16.4% -54.3% -39.2% 23.4% 73.3% 69.7% 49.2% % of consolidated sales 7.0% 6.9% 4.3% 3.1% 3.3% 3.7% 4.8% 5.7% 5.1% 5.7% Eliminations -194 -174 -189 -221 -225 -242 -227 -239 -252 -215 Operating profit (consolidated) 2,300 2,162 2,057 2,258 2,343 2,361 2,363 2,040 2,767 2,704 YoY 25.3% 17.5% 9.8% 43.6% 1.9% 9.2% 14.9% -9.7% 18.1% 14.5% OPM 18.1% 17.7% 18.0% 17.5% 18.9% 17.0% 18.7% 16.4% 20.4% 20.3% Daiseki Co. (parent) 1,931 1,851 1,799 1,589 2,126 2,165 2,230 1,773 2,304 2,343 YoY 22.7% 16.0% 10.4% 18.8% 10.1% 17.0% 24.0% 11.6% 8.4% 8.2% OPM 26.7% 25.7% 24.9% 22.3% 26.9% 26.6% 26.9% 22.8% 26.6% 28.0% Daiseki Eco. Solution 345 193 156 646 273 324 131 170 324 317 YoY -28.0% -50.8% -58.6% 146.8% -20.8% 68.0% -16.0% -73.7% 18.7% -2.1% OPM 8.7% 5.5% 5.4% 14.0% 8.2% 7.2% 4.2% 5.1% 9.2% 9.0% Hokuriku Daiseki 12 13 15 8 19 19 12 18 20 18 YoY 9.1% 30.0% 36.4% 0.0% 58.3% 46.2% -20.0% 125.0% 5.3% -5.3% OPM 6.2% 6.8% 7.5% 4.0% 8.4% 9.3% 5.7% 8.7% 9.7% 9.6% Daiseki MCR 38 -49 21 54 6 -122 -59 -30 28 -17 YoY - - - 1,250.0% -84.2% - - - 366.7% - OPM 6.2% -7.5% 2.6% 6.9% 0.8% -15.7% -8.9% -4.5% 3.9% -2.3% System Kikou -12 171 84 -25 -64 -8 61 125 106 59 YoY - 111.1% -----27.4%--- OPM -1.4% 20.4% 17.0% -6.2% -15.8% -1.6% 10.0% 17.8% 15.4% 7.8% Eliminations -14 -17 -18 -15 -18 -15 -13 -16 -16 -17 Source: Shared Research based on company data
09/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
1H FY02/20 results (out October 1, 2019) Results overview
▷ 1H results: For 1H FY02/20 (from March to August), sales were JPY26.9bn (+2.4% YoY), operating profit was JPY5.5bn (+16.3% YoY) and net income was JPY3.6bn (+15.9% YoY), marking a new record high. The mainstay Daiseki Co. (parent) performed strongly, expanding its share of the industrial waste treatment sector. Margins improved at Daiseki Eco. Solution (TSE 1: 1712), which benefited from orders for difficult-to-process items that differentiate it from its competitors. There was no change to the company’s full-year forecasts: namely, sales of JPY53.5bn (+4.3% YoY), operating profit of JPY10.1bn (+10.9% YoY), and net income of JPY6.7bn (+9.7% YoY). Versus full-year forecasts, 1H sales reached 50.3% (vs. 51.2% in the same period of the previous year), operating profit 54.2% (51.7%), and net income 53.2% (50.3%). The annual dividend forecast was JPY46 per share (JPY23 in 1H and JPY23 in 2H), unchanged from the original forecast. ▷ Daiseki Co. (parent): Sales were JPY17.0bn (+6.1% YoY) and operating profit was JPY4.6bn (+8.3% YoY). Q1 sales (March to May) were up 9.4%, Q2 (June to August) was up 2.9%. The rate of sales growth slowed, reflecting a decline in industrial production, but sales overall benefited from an increase in market share. Q1 GPM was 38.1%, down from the same period in the previous year (38.9%), but Q2 was 39.8%, an improvement from the previous year (38.7%). The ratio of outsourcing costs (such as landfill costs) rose, but this appears to have been affected by a revision of the unit price of orders received. ▷ Daiseki Eco. Solution (DES): Daiseki Eco. Solution sales were JPY7.0bn (-9.9% YoY) and operating profit was JPY641mn (+7.4% YoY). This is in line with the earnings revision disclosed on September 18. The main reason for the decline in sales was the absence of brownfield restoration business recorded in Q2 of the previous fiscal year. GPM was 19.6%, a significant improvement
from 16.7% in the same period of the previous year. Unit prices for soil decontamination work remained low, but the contribution from winning high value-added projects (difficult-to-process projects that enable competitive differentiation and projects that combine construction and processing) along with orders through group collaboration had a positive impact. The
Yokohama-Ebisu Recycling Center, which opened in January 2019, recorded a profit in its first year and has made a steady start. Capacity utilization at the Yatomi Recycle Center, which started operating in March 2017, has improved to the extent that a monthly profit is expected in the second half. ▷ Daiseki MCR: Sales were JPY1.5bn (-3.8% YoY) and operating profit was JPY11mn (vs. a loss of JPY116mn in the same period of the previous year). The decline in sales reflected a worsening of lead market conditions, but production increased 35% YoY and sales volumes rose 15%. As a result of the effective ban on exports of used batteries starting early 2019, raw material
procurement costs declined significantly compared to the same period of the previous year. Profitability improved despite the deterioration of the lead market. ▷ System Kikou: Sales were JPY1.5bn (+58.3% YoY), and operating profit was JPY165mn (vs. a loss of JPY72mn in the same period of the previous year). Capacity utilization remained high at almost 100%, helping to boost profitability. In response to strong demand, the company increased the capacity to receive orders from approximately JPY2.5-3bn to JPY3-3.5 billion. The first half results are slightly ahead of the company plan, although there is a possibility this could change as System Kikou records its revenue based on the completed-contract method. ▷ Q2: Q2 (June to August) sales were JPY13.3bn (-3.7% YoY), operating profit was JPY2.7bn (+14.5% YoY), and net income was JPY1.8bn (+17.6% YoY). Daiseki Co. has continued to expand its market share, but because of the slowdown in industrial production, sales were only up 2.9% YoY, slowing from 9.4% growth in Q1. GPM improved to 39.8% compared with Q2 FY02/19 (38.7%). Daiseki Eco. Solution did not have the brownfield projects it recorded in Q2 the previous fiscal year, and sales fell 21.6% YoY, but orders for difficult-to-process items helped the company curb the gross profit decline to just 1.7%. Daiseki MCR has moved into profit through lower procurement costs of used batteries, and System Kikou secured a profit by strengthening its processing capacity (such as by increasing personnel).
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▷ Change in depreciation method: From FY02/20, the company has moved from declining balance depreciation to straight-line depreciation. The change in accounting method boosted operating profit by JPY108mn in Q1, and JPY166mn in Q2.
Quarterly operating profit by subsidiary
3,000 Daiseki Co. Daiseki Eco. Solution Daiseki MCR System Kikou Eliminations, other 2,767 2,704 2,361 2,343 2,363 2,164 2,011 2,088 2,300 317 2,500 2,134 2,162 2,258 324 1,917 324 130 1,835 1,840 1,873 2,057 273 2,040 345 409 1,778 702 1,586 2,000 278 693 697 193 646 479 376 156 170 276 1,473 392 1,572 1,500 262 425 262 2,304 2,343 2,126 2,165 2,229 1,000 1,931 1,800 1,783 1,851 1,799 1,772 1,576 1,651 1,626 1,581 1,574 1,596 1,629 1,588 1,275 1,338 500 1,177
0
-500 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 Source: Shared Research based on company data
Daiseki Co. (parent) Daiseki Co. (parent) FY02/18 FY02/19 FY02/20 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2% of FYFY Est. Sales 7,232 7,209 7,227 7,110 7,918 8,126 8,303 7,780 8,661 8,359 51.3% 33,170 YoY 12.6% 8.7% 10.1% 16.1% 9.5% 12.7% 14.9% 9.4% 9.4% 2.9% 3.2% Gross profit 2,856 2,745 2,723 2,476 3,077 3,145 3,200 2,743 3,303 3,331 51.3% 12,930 YoY 19.4% 12.7% 10.7% 15.3% 7.7% 14.6% 17.5% 10.8% 7.3% 5.9% 6.3% GPM 39.5% 38.1% 37.7% 34.8% 38.9% 38.7% 38.5% 35.3% 38.1% 39.8% 39.0% Operating profit 1,931 1,851 1,799 1,589 2,126 2,165 2,230 1,773 2,304 2,343 52.4% 8,870 YoY 22.7% 16.0% 10.4% 18.8% 10.1% 17.0% 24.0% 11.6% 8.4% 8.2% 6.9% OPM 26.7% 25.7% 24.9% 22.3% 26.9% 26.6% 26.9% 22.8% 26.6% 28.0% 26.7% Recurring profit 1,984 1,875 1,859 1,619 2,175 2,191 2,293 1,783 2,351 2,374 52.9% 8,940 YoY 22.5% 15.8% 11.1% 18.4% 9.6% 16.9% 23.3% 10.1% 8.1% 8.4% 5.9% RPM 27.4% 26.0% 25.7% 22.8% 27.5% 27.0% 27.6% 22.9% 27.1% 28.4% 27.0% Net income 1,414 1,292 1,318 1,168 1,560 1,514 1,592 1,316 1,633 1,633 53.1% 6,150 YoY 38.8% 19.2% 17.4% 27.9% 10.3% 17.2% 20.8% 12.7% 4.7% 7.9% 2.8% Net margin 19.6% 17.9% 18.2% 16.4% 19.7% 18.6% 19.2% 16.9% 18.9% 19.5% 18.5% Source: Shared Research based on company data
Index of industrial production and Daiseki parent sales
20% Daiseki Co. Industrial production index (right axis) 10 15% 8 6 10% 4 5% 2 0% 0 -5% -2 -10% -4 -15% -6 Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 Source: Shared Research based on company data
Daiseki Co. (parent) gross profit margin and GPM YoY
44% GPM (right axis) YoY (right axis) 25% 42% 20% 15% 40% 39.8% 10% 38% 39.5% 38.9% 38.7% 38.5% 38.2% 38.1% 38.1% 37.6% 37.7% 5% 37.2% 37.5% 36% 36.9% 36.7% 36.0% 0% 34% 35.2% 35.1% 35.0% 35.3% 34.8% -5% 33.6% 32% 32.9% -10% 30% -15% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20
Source: Shared Research based on company data
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Sales by locat ion FY02/18 FY02/19 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Daiseki Co. (parent) 7,232 7,209 7,226 7,110 7,918 8,126 8,302 7,780 8,661 8,359 YoY 12.6% 8.7% 10.1% 16.1% 9.5% 12.7% 14.9% 9.4% 9.4% 2.9% Nagoya 2,351 2,279 2,179 2,126 2,302 2,381 2,382 2,222 2,383 2,336 YoY 24.9% 14.7% 8.7% 12.8% -2.1% 4.5% 9.3% 4.5% 3.5% -1.9% % of Daiseki Co. (parent) 32.5% 31.6% 30.2% 29.9% 29.1% 29.3% 28.7% 28.6% 27.5% 27.9% Hokuriku 793 830 880 797 960 986 1,008 890 1,075 1,104 YoY 10.6% 5.1% 14.4% 17.7% 21.1% 18.8% 14.5% 11.7% 12.0% 12.0% % of Daiseki Co. (parent) 11.0% 11.5% 12.2% 11.2% 12.1% 12.1% 12.1% 11.4% 12.4% 13.2% Kansai 1,180 1,235 1,234 1,259 1,348 1,453 1,443 1,301 1,473 1,427 YoY 10.6% 11.0% 22.2% 26.4% 14.2% 17.7% 16.9% 3.3% 9.3% -1.8% % of Daiseki Co. (parent) 16.3% 17.1% 17.1% 17.7% 17.0% 17.9% 17.4% 16.7% 17.0% 17.1% Kyushu 1,217 1,206 1,203 1,209 1,440 1,375 1,358 1,393 1,550 1,429 YoY 2.1% -0.8% 4.7% 10.6% 18.3% 14.0% 12.9% 15.2% 7.6% 3.9% % of Daiseki Co. (parent) 16.8% 16.7% 16.6% 17.0% 18.2% 16.9% 16.4% 17.9% 17.9% 17.1% Kanto 1,481 1,402 1,490 1,529 1,650 1,657 1,827 1,690 1,791 1,729 YoY 8.3% 7.9% 5.9% 19.3% 11.4% 18.2% 22.6% 10.5% 8.5% 4.3% % of Daiseki Co. (parent) 20.5% 19.4% 20.6% 21.5% 20.8% 20.4% 22.0% 21.7% 20.7% 20.7% Chiba 207 254 238 188 215 272 282 281 386 331 YoY 4.5% 13.9% 8.7% -1.1% 3.9% 7.1% 18.5% 49.5% 79.5% 21.7% % of Daiseki Co. (parent) 2.9% 3.5% 3.3% 2.6% 2.7% 3.3% 3.4% 3.6% 4.5% 4.0% Source: Shared Research based on company data
Industrial production index and Daiseki Co. (parent) sales (excluding sales to DES)
Daiseki Co. sales (Nagoya, Hokuriku) (JPYmn) (JPYmn) Daiseki Co. sales (ex. DES) Industrial prod. index (right axis) Industrial prod. index: Chubu (right axis) 10,000 150 4,000 Transportation equip. industry (Chubu; right axis) 130 3,500 120 8,000 120 3,000 110 100 6,000 90 2,500 90 2,000 80 4,000 60 1,500 70 1,000 2,000 30 60 500 50 0 0 0 40 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/11 FY02/13 FY02/15 FY02/17 FY02/19 FY02/11 FY02/13 FY02/15 FY02/17 FY02/19
(JPYmn) Daiseki Co. sales (Kansai) (JPYmn) Daiseki Co. sales (Kanto, Chiba) (JPYmn) Daiseki Co. sales (Kyushu) 1,600 110 2,500 150 1,800 150 Industrial prod. index: Kinki (right axis) Industrial prod. index: Kanto (right axis) Industrial prod. index: Kyushu (right axis) 1,400 1,500 105 2,000 120 120 1,200 1,200 1,000 100 1,500 90 90 800 900
600 95 1,000 60 60 600 400 90 500 30 30 300 200
0 85 0 0 0 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/11 FY02/13 FY02/15 FY02/17 FY02/19 FY02/11 FY02/13 FY02/15 FY02/17 FY02/19 FY02/11 FY02/13 FY02/15 FY02/17 FY02/19 Source: Shared Research based on Ministry of Economy, Trade and Industry data
Crude Oil CIF price trends
100,000 CIF price (JPY/kl) CIF price (right axis; USD/bbl) 200
80,000 160
60,000 120
40,000 80
20,000 40
0 0 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Shared Research based on Ministry of Economy, Trade and Industry data
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Daiseki Eco. Solution (DES) Daiseki Eco. Solution FY02/18 FY02/19 FY02/20 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2% of FYFY Est. Sales 3,984 3,482 2,859 4,601 3,332 4,475 3,086 3,300 3,524 3,508 49.7% 14,150 YoY -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 8.0% -28.3% 5.8% -21.6% -0.3% Gross profit 683 530 437 1,010 623 683 512 548 708 671 54.1% 2,550 YoY -12.6% -20.2% -36.9% 80.8% -8.7% 28.9% 16.9% -45.8% 13.6% -1.7% 7.8% GPM 17.1% 15.2% 15.3% 21.9% 18.7% 15.3% 16.6% 16.6% 20.1% 19.1% 18.0% Operating profit 345 193 156 646 273 324 131 170 324 317 61.7% 1,040 YoY -28.0% -50.8% -58.6% 146.8% -20.8% 68.0% -16.0% -73.7% 18.7% -2.1% 15.8% OPM 8.7% 5.5% 5.4% 14.0% 8.2% 7.2% 4.2% 5.1% 9.2% 9.0% 7.3% Recurring profit 364 214 128 662 263 327 150 164 349 328 63.3% 1,070 YoY -23.8% -45.8% -66.1% 134.8% -27.7% 52.8% 17.2% -75.2% 32.7% 0.3% 18.4% RPM 9.1% 6.1% 4.5% 14.4% 7.9% 7.3% 4.9% 5.0% 9.9% 9.4% 7.6% Net income 251 125 58 510 164 196 77 127 212 188 63.5% 630 YoY -18.2% -51.4% -73.1% 193.1% -34.7% 56.8% 32.8% -75.1% 29.3% -4.1% 11.7% Net margin 6.3% 3.6% 2.0% 11.1% 4.9% 4.4% 2.5% 3.8% 6.0% 5.4% 4.5% Sales, GPM, and OPM
6,000 30% Sales GPM (right axis) OPM (right axis)
5,000 21.9% 25% 20.7% 19.9% 20.2% 20.1% 19.3% 19.2% 19.6% 19.1% 4,000 18.8% 18.7% 20% 17.2% 16.9% 17.1% 16.1% 16.4% 16.6% 16.6% 15.2% 15.2% 15.3% 15.3% 13.9% 14.0% 3,000 13.2% 12.9% 15% 12.1% 11.4% 11.5% 12.0% 10.6% 9.7% 9.2% 9.0% 8.6% 8.7% 8.2% 2,000 7.2% 7.7% 7.2% 10% 5.5% 5.4% 5.1% 4.2% 1,000 5%
0 0% Q1 Q1 Q1 Q1 Q1 Q1 (JPYmn) FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 Source: Shared Research, based on company data
Soil contamination treatment volume
500,000 Soil contamination treatment volume (incl. industrial waste) Cleanup (right axis) 50,000
400,000 40,000
300,000 30,000
200,000 20,000
100,000 10,000
0 0 (tons) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (tons) FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 Source: Shared Research based on company data
Green Arrows Central (GAC), Green Arrows Kyushu (GAK) plasterboard collection volumes
5,000 GAC (monthly) GAC (quarterly average) GAK (quarterly average; right axis) 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
0 0 (MT) Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 (MT) Source: Shared Research based on company data
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Soil contamination treatment sales by region
3,000 Nagoya Kansai Tokyo Tohoku
2,500
2,000
1,500
1,000
500
0 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 Source: Shared Research based on company data
Sales by division FY02/18 FY02/19 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Daiseki Eco. Solution 3,984 3,482 2,859 4,601 3,332 4,475 3,086 3,300 3,524 3,508 YoY -4.0% 6.3% -19.4% 35.4% -16.4% 28.5% 7.9% -28.3% 5.8% -21.6% Nagoya 1,696 1,098 861 752 800 704 715 808 856 937 YoY 17.5% 12.4% -14.9% -25.5% -52.8% -35.9% -17.0% 7.4% 7.0% 33.1% % of Daiseki Eco. Solution 42.6% 31.5% 30.1% 16.3% 24.0% 15.7% 23.2% 24.5% 24.3% 26.7% Tokyo 1,130 1,220 910 2,353 957 2,669 1,244 1,109 1,276 1,007 YoY -29.0% 13.9% -6.7% 196.0% -15.3% 118.8% 36.7% -52.9% 33.3% -62.3% % of Daiseki Eco. Solution 28.4% 35.0% 31.8% 51.1% 28.7% 59.6% 40.3% 33.6% 36.2% 28.7% Kansai 586 570 399 831 977 542 501 625 585 769 YoY 19.1% -25.2% -58.6% 7.4% 66.7% -4.9% 25.6% -24.8% -40.1% 41.9% % of Daiseki Eco. Solution 14.7% 16.4% 14.0% 18.1% 29.3% 12.1% 16.2% 18.9% 16.6% 21.9% Tohoku 4 20 16 82 53 32 15 36 20 9 YoY -97.6% -61.5% 45.5% 228.0% 1,225.0% 60.0% -6.3% -56.1% -62.3% -71.9% % of Daiseki Eco. Solution 0.1% 0.6% 0.6% 1.8% 1.6% 0.7% 0.5% 1.1% 0.6% 0.3% Other 214 212 280 209 151 152 240 345 297 300 YoY 68.0% 88.8% 14.6% -53.1% -29.3% -28.3% -14.2% 65.1% 96.7% 97.4% % of Daiseki Eco. Solution 5.4% 6.1% 9.8% 4.5% 4.5% 3.4% 7.8% 10.5% 8.4% 8.6% Green Arrows Central 226 234 254 245 253 247 247 254 353 343 YoY 13.0% 32.2% 27.0% 19.5% 11.9% 5.6% -2.8% 3.7% 39.5% 38.9% % of Daiseki Eco. Solution 5.7% 6.7% 8.9% 5.3% 7.6% 5.5% 8.0% 7.7% 10.0% 9.8% Green Arrows Kyushu 128 128 138 127 140 127 124 122 134 142 YoY 1.6% 1.6% -2.1% -12.4% 9.4% -0.8% -10.1% -3.9% -4.3% 11.8% % of Daiseki Eco. Solution 3.2% 3.7% 4.8% 2.8% 4.2% 2.8% 4.0% 3.7% 3.8% 4.0% Source: Shared Research based on company data
Soil treatment volume FY02/18 FY02/19 FY02/20 Quarterly (tons) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Soil treatment 226,968 203,540 167,204 312,269 217,403 164,307 209,494 213,115 210,425 167,006 YoY 15.7% 11.7% -18.4% 20.1% -4.2% -19.3% 25.3% -31.8% -3.2% 1.6% Cleanup 9,675 39,714 31,693 38,706 42,997 30,046 36,749 35,296 36,329 48,156 YoY -22.1% 602.2% 256.8% 155.9% 344.4% -24.3% 16.0% -8.8% -15.5% 60.3% Source: Shared Research based on company data
Plasterboard collect ion volume FY02/18 FY02/19 FY02/20 Quarterly (tons) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Total collection volume 18,419 18,489 19,300 18,214 20,121 18,829 19,522 19,594 21,655 20,364 YoY 10.9% 13.4% 4.0% 3.4% 9.2% 1.8% 1.2% 7.6% 7.6% 8.2% Green Arrows Central 10,523 11,041 11,233 10,826 11,635 11,656 11,920 11,640 13,063 12,592 YoY 9.3% 19.5% 5.1% 3.3% 10.6% 5.6% 6.1% 7.5% 12.3% 8.0% Green Arrows Kyushu 7,896 7,448 8,067 7,388 8,486 7,173 7,602 7,954 8,592 7,772 YoY 13.2% 5.4% 2.6% 3.5% 7.5% -3.7% -5.8% 7.7% 1.2% 8.4% Source: Shared Research based on company data
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Daiseki MCR Daiseki MCR FY02/18 FY02/19 FY02/20 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2% of FYFY Est. Sales 614 650 805 777 741 778 665 664 726 736 50.2% 2,910 YoY 8.7% 37.1% 56.3% 30.4% 20.7% 19.7% -17.4% -14.5% -2.0% -5.4% 2.2% Gross profit 98 6 97 112 63 -63 -2 23 85 22 25.5% 420 YoY - - 781.8% 96.5% -35.7% - - -79.5% 34.9% - 1,900.0% GPM 16.0% 0.9% 12.0% 14.4% 8.5% -8.1% -0.3% 3.5% 11.7% 3.0% 14.4% Operating profit 38 -49 21 54 6 -122 -59 -30 28 -17 5.5% 199 YoY - - - 1,250.0% -84.2% - - - 366.7% - - OPM 6.2% -7.5% 2.6% 6.9% 0.8% -15.7% -8.9% -4.5% 3.9% -2.3% 6.8% Recurring profit 39 -49 21 54 10 -120 -56 -35 29 -16 6.5% 200 YoY - - - 1,250.0% -74.4% - - - 190.0% - - RPM 6.4% -7.5% 2.6% 6.9% 1.3% -15.4% -8.4% -5.3% 4.0% -2.2% 6.9% Net income 39 -49 27 64 13 -115 -57 -35 21 -10 5.5% 200 YoY - - - 1,180.0% -66.7% - - - 61.5% - - Net margin 6.4% -7.5% 3.4% 8.2% 1.8% -14.8% -8.6% -5.3% 2.9% -1.4% 6.9% Source: Shared Research based on company data Note: The domestic lead price in FY02/17 is an estimate by Shared Research based on projected LME lead prices and exchange rates.
Lead price trends LME lead prices (JPY/kg) LME spot prices (right axis; USD/ton) 290 2,900
270 2,700
250 2,500
230 2,300
210 2,100
190 1,900
170 1,700
150 1,500 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Source: Shared Research based on Bloomberg and Mizuho Bank data
System Kikou System Kikou FY02/18 FY02/19 FY02/20 FY02/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2% of FYFY Est. Sales 888 839 495 405 406 510 611 702 689 761 55.8% 2,600 YoY 75.1% -5.1% 53.7% 16.4% -54.3% -39.2% 23.4% 73.3% 69.7% 49.2% 16.6% Gross profit 54 236 157 56 3 66 160 197 179 127 61.7% 496 YoY 50.0% 45.7% - - -94.4% -72.0% 1.9% 251.8% 5,866.7% 92.4% 16.4% GPM 6.1% 28.1% 31.7% 13.8% 0.7% 12.9% 26.2% 28.1% 26.0% 16.7% 19.1% Operating profit -12 171 84 -25 -64 -8 61 125 106 59 81.7% 202 YoY - 111.1% -----27.4%--- 77.2% OPM -1.4% 20.4% 17.0% -6.2% -15.8% -1.6% 10.0% 17.8% 15.4% 7.8% 7.8% Recurring profit -12 172 83 -24 -64 -9 61 126 108 59 83.5% 200 YoY - 112.3% -----26.5%--- 75.4% RPM -1.4% 20.5% 16.8% -5.9% -15.8% -1.8% 10.0% 17.9% 15.7% 7.8% 7.7% Net income -9 111 53 -14 -43 -6 77 74 74 37 86.7% 128 YoY -85.0%----45.3%--- 25.5% Net margin -1.0% 13.2% 10.7% -3.5% -10.6% -1.2% 12.6% 10.5% 10.7% 4.9% 4.9% Source: Shared Research based on company data
For previous results, see the Historical performance section.
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Company forecasts for FY02/20
Consolidated FY02/18 FY02/19 FY02/20 (JPYmn) 1H2HFY1H2HFY1H Act.2H Est.FY Est. Sales 24,916 24,269 49,185 26,249 25,064 51,313 26,892 26,608 53,500 YoY 9.0% 13.6% 11.2% 5.3% 3.3% 4.3% 2.4% 6.2% 4.3% Gross profit 7,314 7,170 14,484 7,717 7,472 15,189 8,535 7,665 16,200 YoY 16.2% 18.1% 17.1% 5.5% 4.2% 4.9% 10.6% 2.6% 6.7% GPM 29.4% 29.5% 29.4% 29.4% 29.8% 29.6% 31.7% 28.8% 30.3% Operating profit 4,462 4,315 8,777 4,704 4,403 9,107 5,471 4,629 10,100 YoY 21.4% 25.3% 23.3% 5.4% 2.0% 3.8% 16.3% 5.1% 10.9% OPM 17.9% 17.8% 17.8% 17.9% 17.6% 17.7% 20.3% 17.4% 18.9% Recurring profit 4,554 4,360 8,914 4,743 4,456 9,199 5,554 4,646 10,200 YoY 22.5% 24.2% 23.3% 4.2% 2.2% 3.2% 17.1% 4.3% 10.9% RPM 18.3% 18.0% 18.1% 18.1% 17.8% 17.9% 20.7% 17.5% 19.1% Net income 2,960 2,873 5,833 3,074 3,036 6,110 3,564 3,136 6,700 YoY 44.7% 37.7% 41.2% 3.9% 5.7% 4.7% 15.9% 3.3% 9.7% Net margin 11.9% 11.8% 11.9% 11.7% 12.1% 11.9% 13.3% 11.8% 12.5%
Daiseki Co. (parent) FY02/18 FY02/19 FY02/20 (JPYmn) 1H2HFY1H2HFY1H Act.2H Est.FY Est. Sales 14,441 14,337 28,778 16,044 16,083 32,127 17,020 16,150 33,170 YoY 10.6% 13.0% 11.8% 11.1% 12.2% 11.6% 6.1% 0.4% 3.2% Gross profit 5,601 5,199 10,800 6,222 5,943 12,165 6,634 6,296 12,930 YoY 16.0% 12.9% 14.5% 11.1% 14.3% 12.6% 6.6% 5.9% 6.3% GPM 38.8% 36.3% 37.5% 38.8% 37.0% 37.9% 39.0% 39.0% 39.0% Operating profit 3,782 3,388 7,170 4,291 4,003 8,294 4,647 4,223 8,870 YoY 19.3% 14.2% 16.8% 13.5% 18.2% 15.7% 8.3% 5.5% 6.9% OPM 26.2% 23.6% 24.9% 26.7% 24.9% 25.8% 27.3% 26.1% 26.7%
Daiseki Eco. Solution FY02/18 FY02/19 FY02/20 (JPYmn) 1H2HFY1H2HFY1H Act.2H Est.FY Est. Sales 7,466 7,460 14,926 7,806 6,387 14,193 7,032 10,118 17,150 YoY 0.5% 7.4% 3.9% 4.6% -14.4% -4.9% -9.9% 58.4% 20.8% Gross profit 1,212 1,447 2,659 1,306 1,059 2,365 1,379 1,171 2,550 YoY -16.1% 15.6% -1.4% 7.7% -26.8% -11.1% 5.6% 10.6% 7.8% GPM 16.2% 19.4% 17.8% 16.7% 16.6% 16.7% 19.6% 11.6% 14.9% Operating profit 538 802 1,339 597 301 898 641 429 1,070 YoY -38.3% 25.7% -11.2% 11.1% -62.5% -33.0% 7.4% 42.4% 19.2% OPM 7.2% 10.7% 9.0% 7.6% 4.7% 6.3% 9.1% 4.2% 6.2%
Daiseki MCR FY02/18 FY02/19 FY02/20 (JPYmn) 1H2HFY1H2HFY1H Act.2H Est.FY Est. Sales 1,264 1,582 2,846 1,519 1,329 2,848 1,462 1,448 2,910 YoY 21.7% 42.4% 32.4% 20.2% -16.0% 0.1% -3.8% 9.0% 2.2% Gross profit 104 209 313 - 21 21107 313 420 YoY - 207.4% - - -90.0% -93.3% - 1,390.5% 1,900.0% GPM 8.2% 13.2% 11.0% - 1.6% 0.7% 7.3% 21.6% 14.4% Operating profit -11 7564 -116 - 89 -205 11188 199 YoY ------OPM -0.9% 4.7% 2.2% -7.6% -6.7% -7.2% 0.8% 13.0% 6.8%
System Kikou FY02/18 FY02/19 FY02/20 (JPYmn) 1H2HFY1H2HFY1H Act.2H Est.FY Est. Sales 1,727 900 2,627 916 1,313 2,229 1,450 1,150 2,600 YoY 24.2% 34.3% 27.5% -47.0% 45.9% -15.2% 58.3% -12.4% 16.6% Gross profit 290 213 503 69 357 426 306 190 496 YoY 46.5% 280.4% 98.0% -76.2% 67.6% -15.3% 343.5% -46.8% 16.4% GPM 16.8% 23.7% 19.1% 7.5% 27.2% 19.1% 21.1% 16.5% 19.1% Operating profit 159 5 9 218 - 72 186 114 165 3 7 202 YoY 381.8% - - - 215.3% -47.7% - -80.1% 77.2% OPM 9.2% 6.6% 8.3% -7.9% 14.2% 5.1% 11.4% 3.2% 7.8% Source: Shared Research, based on company data Overview Forecast sees earnings rising across all group companies, operating profit reaching new high for third straight year For FY02/20, the company is forecasting full-year consolidated sales of JPY53.5bn (+4.3% YoY), an operating profit of JPY10.1bn (+10.9% YoY), and net income attributable to owners of the parent of JPY6.7bn (+9.7% YoY). If realized, this would be the third straight year that operating profit has set a new record high and the first year operating profit has topped JPY10.0bn.
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◤ Daiseki (parent company): At the parent, the company is forecasting FY02/20 sales of JPY33.2bn (+3.2% YoY) and an operating profit of JP8.9bn (+6.9% YoY). The projected gains assume continued solid growth in domestic industrial production and accompanying increases in its industrial waste processing volumes as demand for waste oil processing continues to grow and it expands its share of the industrial waste processing market. With the company's assumption for recycled fuel prices being based on a below-market reference price for WTI crude of USD55–60 per barrel, it is clear that the projected gains are expected to be driven in large part by increases in its processing volumes.
◤ Daiseki Eco. Solution (DES): DES is forecasting FY02/20 sales of JPY14.7bn (+3.7% YoY) and an operating profit of JPY900mn (+0.2% YoY). With prices for soil decontamination work no longer under pressure, this forecast for a modest increase in operating profit depends on 1) the success of its expanded upstream sales effort (undertaken in conjunction with the parent company) to help it increase order volumes and secure better pricing, 2) higher operating rates and lower costs at its Yatomi Recycling Center, 3) additional efficiency gains following the startup of the Yokohama-Ebisu Recycling Center, and 4) and a boost to earnings from a change in depreciation accounting methodology (from declining balance to straight line).
◤ Daiseki MCR: For Daiseki MCR, the company is forecasting FY02/20 sales of JPY2.9bn (+2.2% YoY) and an operating of JPY199mn (versus a year-earlier loss). The sharp turnaround in profitability at Daiseki MCR reflects the company's expectation of stable lead prices, increases in processing volumes, a decline in depreciation, and lower buying prices for used lead batteries.
◤ System Kikou: For System Kikou, the company is forecasting sales of JPY2.6bn (+16.6% YoY) and an operating profit of JPY202mn (+77.2% YoY). The double-digit jump in sales and earnings reflects continued strong growth in demand plus the carryover of projects from FY02/19 that will finally be booked to sales in FY02/20.
Key assumptions underlying the company's forecast for FY02/20 include 1) WTI crude oil prices of USD55–60 per barrel, 2) an average exchange rate of JPY110/USD, and 3) an average LME lead price of USD2,028/ton.
Assumptions Index Unit FY02/17 FY02/18 FY02/19 FY02/20
Assumption Act. Diff. Assumption Act. Diff. Assumption Act. Diff. Assumption Act. Diff.
Cruide oil price W T I crude oil USD 35.0 46.9 34% 50-55 52.4 - 60–65 63.2 55–60 Forex USD/JPY 115.0 108.4 -6% 113.0 111.5 -1% 108.0 110.5 2% 110.0 Lead price LME lead USD/ton 1,820 1,965 8% 2,300 2,365 3% 2,420 2,151 -11% 2,028 Source: Shared Research, based on company data
Sensitivity: 1) The price the parent company receives for recycled fuel varies in direct proportion to the domestic price of heavy oil. If crude oil prices rise and/or the yen weakens against the dollar, the domestic price of heavy oil will increase and so too will the price the company can get for recycled fuel. In FY02/19, the parent sold roughly 270,000 tons of recycled fuel. 2) Daiseki MCR sells lead that has been recovered from used lead batteries, using the LME price as its reference price.
Operating profit
11,700 12,000 11,200 Daiseki (parent) Daiseki Eco. Solution 10,100 10,000 9,107 7,849 8,777 900 8,201 898 7,539 7,298 7,302 7,120 8,000 1,339 1,226 2,517 5,750 1,508 5,697 957 1,005 5,390 5,404 1,298 6,000 4,865 408 586 128 592 4,082 8,294 8,870 4,000 3,102 193 693 2,683 7,170 2,341 2,483 100 6,160 6,158 5,866 6,434 6,035 6,137 1,890 2,007 5,197 5,475 5,263 120 49 151 5,055 2,000 6 3,844 3,782 2,955 1,901 2,206 2,063 2,460 2,488 0 -20
-2,000 (JPYmn) FY02/00 FY02/02 FY02/04 FY02/06 FY02/08 FY02/10 FY02/12 FY02/14 FY02/16 FY02/18 FY02/20 FY02/22 Est. Est. Source: Shared Research, based on company data
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Daiseki Co. (parent company)
Daiseki (parent) FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Est. Sales 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 32,127 33,170 Nagoya6,986 7,705 7,487 7,881 8,233 7,962 7,761 8,937 9,289 9,776 Hokuriku 2,834 2,781 2,793 3,104 3,197 3,249 2,955 3,303 3,845 4,000 Kansai 3,985 4,147 4,142 4,190 4,434 4,332 4,188 4,909 5,546 5,921 Kyushu 3,312 3,448 3,597 3,915 4,236 4,356 4,651 4,836 5,567 5,720 Kanto 4,040 5,170 5,045 5,157 5,424 5,344 5,357 5,904 6,825 6,700 Chiba 698 756 742 825 933 769 832 888 1,052 1,053 YoY 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 11.6% 3.2% Nagoya 7.7% 10.3% -2.8% 5.3% 4.5% -3.3% -2.5% 15.2% 3.9% 5.2% Hokuriku 20.9% -1.9% 0.4% 11.1% 3.0% 1.6% -9.0% 11.8% 16.4% 4.0% Kansai 15.1% 4.1% -0.1% 1.2% 5.8% -2.3% -3.3% 17.2% 13.0% 6.8% Kyushu 17.0% 4.1% 4.3% 8.8% 8.2% 2.8% 6.8% 4.0% 15.1% 2.7% Kanto 16.4% 28.0% -2.4% 2.2% 5.2% -1.5% 0.2% 10.2% 15.6% -1.8% Chiba 14.4% 8.3% -1.9% 11.2% 13.1% -17.6% 8.2% 6.7% 18.5% 0.1% Gross profit 8,035 8,453 8,278 8,942 9,699 9,068 9,433 10,800 12,165 12,930 GPM 36.8% 35.2% 34.8% 35.7% 36.7% 34.9% 36.6% 37.5% 37.9% 39.0% SG&A expenses 2,838 2,978 3,015 3,076 3,265 3,033 3,296 3,630 3,871 4,060 YoY 1.9%4.9%1.2%2.0%6.1%-7.1% 8.7% 10.1% 6.6% 4.9% SG&A ratio 13.0% 12.4% 12.7% 12.3% 12.3% 11.7% 12.8% 12.6% 12.0% 12.2% Operating profit 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 8,294 8,870 YoY 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7% 16.8% 15.7% 6.9% OPM 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 25.8% 26.7% WTI crude oil (USD/bbl) 81 97 93 98 85 46 47 52 63 55–60 YoY 20.3% 19.0% -3.9% 5.7% -13.3% -46.1% 1.8% 11.9% 20.5% USD/JPY 87 79 82 100 108 121 108 111 110 110 YoY -7.5% -8.7% 3.7% 21.5% 8.7% 11.7% -10.3% 2.8% -0.8% -0.4% Source: Shared Research, based on company data Company expects to continue increasing its market share Under its forecast for FY02/20, market share increases will be the main growth driver at parent company Daiseki. In FY02/19, the parent company saw its waste processing volumes increase 8% YoY to nearly 1.2mn tons, even without a major improvement in domestic industrial production. Shared Research sees Daiseki's market share gains stemming from a number of different factors, including 1) the high level of its expertise as a specialist in industrial waste processing; 2) its shift to a new sales organization that does not cover just individual plants but also seeks to cover all of a client company's domestic plants; and 3) the growing awareness of ESG and the willingness on the part of client companies to place more of their orders with vendors who are good at showing what they are doing on this front. (In the case of Daiseki, it also helps that it has been named as a blue-ribbon company in the field of industrial waste processing by Japan's Ministry of the Environment.)
Daiseki parent sales vs. Industrial production index (YoY)
20% Daiseki Co. Industrial production index (right axis) 20 15% 15
10% 10
5% 5
0% 0
-5% -5
-10% -10
-15% -15 Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research, based on company data
To be precise, the parent company opened a total of 634 new client accounts during FY02/19, boosting the number of its active client accounts (those that have generated sales during the past year) to 6,453. Over the last ten years, the parent company has added new client accounts at the rate of more than 600 a year, thereby steadily expanding its market share.
For FY02/20, the parent company is projecting full-year sales of JPY33.2bn (+3.2% YoY). The forecast for modest top-line growth reflects the company's concerns about a possible slowdown in the economy and internal limitations in terms of processing capacity and manpower. That said, during our recent interview the company said processing capacity and manpower will not be bottlenecks that prevent it from growing sales in FY02/20. Looking at its projections for 1H and 2H, the forecast for 1H sales
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(JPY16.9bn) represents a YoY increase of 5.5%, whereas for 2H (sales estimated at JPY16.3bn), it is only 1.3%. The difference, we believe, reflects the company’s caution in the face of poor visibility into the trends in the domestic economy and industrial production in the latter half of this year, and its preference for a conservative 2H forecast until there is better visibility that far out. In light of this reasoning, Shared Research understands Daiseki is likely to exceed its current forecast for full-year sales, provided it continues adding customers at its current rate and there is no major decline in industrial production.
Number of active client accounts: Daiseki parent (accounts that generated revenue during the year under review)
7,000 1,200 Full-year No. of new accounts (right axis) 6,453 6,352 6,268 6,013 6,000 5,826 800 5,715 658 5,693 795 769 789 777 608 698 5,407 690 673 664 5,256 617 626 634 584 5,072 5,123 4,953 5,000 400 4,691 4,742
4,000 0 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research, based on company data
Waste collection volume and recycled volume (left) and non-recycled volume (right)
Waste shipment volume ('000 tons) Waste shipment volume ('000 tons) Landfills ('000 tons) 1,400 Fuel recycling ('000 tons, right axis) 350 1,400 Burning ('000, right axis) 120 Raw material recycling ('000 tons, right axis) 1,200 300 1,200 100 1,000 250 1,000 80 800 200 800 60 600 600 150 40 400 400 100 200 20 200 50 0 0 0 0 FY02/03 FY02/06 FY02/09 FY02/12 FY02/15 FY02/18 FY02/03 FY02/06 FY02/09 FY02/12 FY02/15 FY02/18 Source: Shared Research based on company data
On the earnings front, the company sees few threats to profitability in FY02/20. The selling price of recycled fuel, which by our estimate accounts for roughly 10% of parent company sales, varies depending on the domestic price of heavy oil. In both FY02/15 and FY02/16, selling prices for recycled fuel were depressed by the falling price of crude oil, squeezing the company's margin on recycled fuel sales (because in most cases the company does not hike the price it charges customers to haul away their industrial waste based on lower crude oil prices). Crude oil prices finally bottomed out in early 2016 and have been slowly working their way back up since; as of April 2019, the WTI price was holding comfortably above the USD55–60 per barrel range that the company is assuming for crude oil prices in FY02/20. Assuming the crude prices remain at the current level, the parent company can expect to see higher selling prices for its recycled oil help bring earnings in ahead of its current projections for FY02/20.
CIF price trends 100,000 200 CIF price (JPY/kl) CIF price (right axis; USD/bbl) 80,000 150
60,000 100 40,000
50 20,000
- - Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Shared Research, based on data provided by the company, the Ministry of Finance Japan, and Ministry of Economy, Trade and Industry
With regard to the increase in transportation costs it is facing, the company noted that transportation costs were equal to 11.8% of parent company sales in FY02/19 versus 11.4% in FY02/18 and 10.9% in FY02/17. Following the rise in trucking rates the
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company went around to customers to negotiate rate increases that would cover the increase in shipping costs. As almost all of the customers affected accepted these rate increases, it seems unlikely that the increase in transportation costs that the company has seen thus far would have a major impact on earnings.
With regard to the expected decline in its depreciation burden, the company noted that depreciation of JPY1.1bn in FY02/19 was equal to 3.5% of parent company sales, and that its switch in depreciation accounting from declining balance to straight line would reduce its depreciation burden by JPY565mn in FY02/20. The change in depreciation accounting methodology will of course have no impact on cash flow, but it will increase earnings as reported on the income statement.
With respect to margins, we note that the parent company forecast of gross profit of JPY12.9bn (+6.3% YoY) represents a gross profit margin of 38.9%, projected SG&A expenses of JPY4.1bn (+4.9% YoY) represents an SG&A expense margin of 12.2%, and the projected operating profit of JPY8.9bn (+6.9% YoY) represents an operating profit margin of 26.7%. In short, backed by the rise in market share, the company sees earnings continuing to growth as it maintains a high operating profit margin.
Capital spending plans call for a total of JPY10.8bn in capex in FY02/20 (versus JPY1.2bn in FY02/19). Of this, JPY8.0bn will go towards the acquisition of land in the Kansai region. The company is currently in the midst of negotiating the terms of the Kansai land purchase with the goal of acquiring the land around the beginning of autumn; after all the necessary permitting and construction, the company expects to start up operations at the new Kansai plant around FY02/23. The capital budget for FY02/20 also includes JPY400mn for facility upgrades at its existing Kansai plant and JPY185mn for upgrades at its Kanto plant.
South Kanto facility Existing facilities operating in Kanto are located in Tochigi Prefecture and Chiba Prefecture (mainly recycling waste oil). There is strong demand for industrial waste processing services in the area stretching from Tokyo to Yokohama, where there is a high concentration of companies in the heavy and chemical industries. Yet Daiseki has struggled to expand there, owing to high transportation costs and long hauling times. Due to the long time needed to get permitted for industrial waste processing, in the past the company looked to M&A as a shortcut to entering the market in this region. A lot of time went by with no progress, though, so the company decided instead to try to acquire a suitable plot of land on its own. Given the time needed for permitting and construction, two to three years would be needed from the time the land is acquired until a new facility is up and running. During our recent interview, the company expressed its need to acquire land in the Kanto area, so we will also be watching developments on this front as well.
Even if it is able to buy land, it will probably be many years before it can get permission to process industrial waste. So, this initiative will not lead to higher earnings in the short term, but we think it may contribute to medium-term earnings.
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Daiseki Eco. Solution
Daiseki Eco. Solution FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Est. Sales 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 14,193 14,712 Nagoya2,314 2,334 2,303 3,189 3,505 5,682 4,443 4,407 3,027 3,855 Tokyo1,632 3,295 2,671 2,585 2,915 6,568 4,433 5,613 5,979 4,850 Kansai 1,254 1,598 1,430 2,377 4,584 4,260 2,992 2,386 2,645 2,737 Tohoku - - 149 1,349 514 480 256 122 136 140 GA Chubu - - 662 732 769 814 782 959 1,001 1,298 GA Kyushu - - - 128 293 376 538 521 513 530 YoY -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% -4.9% 3.7% Nagoya -31.5% 0.9% -1.3% 38.5% 9.9% 62.1% -21.8% -0.8% -31.3% 27.4% Tokyo -0.9% 101.9% -18.9% -3.2% 12.8% 125.3% -32.5% 26.6% 6.5% -18.9% Kansai -36.2% 27.4% -10.5% 66.2% 92.8% -7.1% -29.8% -20.3% 10.9% 3.5% Tohoku - - - 805.4% -61.9% -6.6% -46.7% -52.3% 11.5% 2.9% GA Chubu - - - 10.6% 5.0% 5.9% -3.9% 22.6% 4.4% 29.7% GA Kyushu - - - - 128.9% 28.3% 43.1% -3.2% -1.5% 3.3% Gross profit 733 1,085 1,392 2,120 2,100 3,603 2,696 2,659 2,365 2,501 GPM 14.0% 15.0% 18.5% 20.0% 16.4% 18.9% 18.8% 17.8% 16.7% 17.0% SG&A expenses 605 677 801 823 874 1,086 1,188 1,320 1,467 1,601 YoY -1.5% 11.8% 18.3% 2.7% 6.3% 24.3% 9.4% 11.1% 11.1% 9.1% SG&A ratio 11.6% 9.4% 10.7% 7.8% 6.8% 5.7% 8.3% 8.8% 10.3% 10.9% Operating profit 128 408 592 1,298 1,226 2,517 1,508 1,339 898 900 YoY -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% -33.0% 0.2% OPM 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 6.3% 6.1% Net income 45 209 299 713 715 1,516 955 944 564 520 Net margin 0.9% 2.9% 4.0% 6.7% 5.6% 7.9% 6.6% 6.3% 4.0% 3.5% Soil treatment volume (a) 391,817 602,916 530,937 660,238 818,887 1,090,056 843,487 909,981 804,319 - YoY -16.7% 53.9% -11.9% 24.4% 24.0% 33.1% -22.6% 7.9% -11.6% - Cleanup --41,610 46,175 56,022 59,737 42,081 119,788 145,088 - YoY - - - 11.0% 21.3% 6.6% -29.6% 184.7% 21.1% - Soil treatment sales / (a) (JPY) 12,879 11,613 12,349 14,389 14,068 15,569 14,400 13,768 14,658 YoY - -9.8% 6.3% 16.5% -2.2% 10.7% -7.5% -4.4% 6.5% Sales 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 14,193 14,712 Soil treatment 5,046 7,001 6,556 9,500 11,520 16,971 12,146 12,529 11,789- Plasterboard - - 662 735 773 1,196 1,329 1,490 1,527 - Others 354 354 445 491 715 1,092 1,110 1,133 1,080 - Operating profit 128 408 592 1,298 1,226 2,517 1,508 1,339 898 900 Soil treatment 367 661 747 1,427 1,369 2,830 1,832 1,587 1,298 - Plasterboard - - 127 194 174 82 125 263 300 - Others 46 79 58 65 93 130 142 167 118 - Adjustments -285 -332 -340 -388 -410 -526 -590 -678 -817 - OPM 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 6.3% 6.1% Soil treatment 7.3% 9.4% 11.4% 15.0% 11.9% 16.7% 15.1% 12.7% 11.0% - Plasterboard - - 19.2% 26.4% 22.5% 6.9% 9.4% 17.7% 19.6% - Others 13.0% 22.2% 13.1% 13.2% 13.0% 11.9% 12.8% 14.7% 10.9% - Depreciation 298 259 338 305 313 525 526 822 749 - Soil treatment 248 210 182 165 164 180 190 544 513 - Plasterboard - - 96 72 82 274 269 224 189 - Others 25 25 55 43 40 52 46 38 29 - Adjustments 25245252718211618- EBITDA 426 667 929 1,603 1,539 3,042 2,035 2,161 1,647 900 Soil treatment 615 871 929 1,592 1,533 3,010 2,021 2,131 1,811 - Plasterboard - - 223 267 256 356 394 487 489 - Others 71 103 113 108 133 183 188 204 146 - EBITDA margin 8.1% 9.2% 12.4% 15.1% 12.0% 15.9% 14.2% 14.5% 11.6% 6.1% Soil treatment 12.2% 12.4% 14.2% 16.8% 13.3% 17.7% 16.6% 17.0% 15.4% - Plasterboard - - 33.7% 36.2% 33.2% 29.8% 29.6% 32.7% 32.0% - Others 20.0% 29.1% 25.5% 21.9% 18.6% 16.7% 16.9% 18.0% 13.6% - Capital expenditures 112 217 1,343 776 1,625 739 2,710 4,479 4,944 - Soil treatment 96 88 368 44 187 148 2,563 4,392 3,947 - Plasterboard - - 97 134 583 409 104 45 275 - Others 15 127 199 84 782 147 30 4 62 - Adjustments 1 268051374351338660- Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.
For FY02/20, Daiseki Eco. Solution (DES) is forecasting sales of JPY14.7bn (+3.7% YoY) and an operating profit of JPY900mn (+0.2% YoY). In FY02/19, the plasterboard recycling business operated by Green Arrows Chubu (GAC) and Green Arrows Kyushu (GAK) fared well, reporting combined sales of JPY1.5bn (+2.5% YoY) and operating profit of JPY299mn (+13.9% YoY). Overall earnings at DES were lackluster, however, hit by depressed prices at its mainstay business in soil contamination analysis and remediation and a lack of high-margin brownfield restoration projects. Unit prices for soil decontamination work are no longer falling, having found a floor in 1H FY02/19, but they remain depressed and this means DES will face a tough operating environment again in FY02/20.
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Brownfield restoration business: In this business, DES buys vacant land where the soil or ground water is contaminated, analyzes the soil for contaminants, and then takes the necessary steps to decontaminate the soil, thereby creating a "green field" that can be resold to a third-party. While the turnaround time for brownfield projects is relatively short, because the company must buy and hold the land while the work is being done, there is always the risk that land prices will decline. Such land purchases also mean the company must tie-up additional capital in land while projects are underway. On the plus side, these brownfield projects are more profitable than the soil remediation work the company normally does.
Major initiatives planned for FY02/20
◤ Working together with parent company Daiseki, DES will be increasing its upstream sales activity in an effort to maintain order pricing by winning package orders (including construction and soil remediation) for more complex contamination situations
◤ Increase the capacity utilization rate at Yatomi Recycling Center and reduce costs by better coordinating the work flow through recycling centers in Nagoya, Tokyo, Kansai, and Tohoku
◤ Reduce costs/increase efficiency by taking advantage of economies of scale offered by the two Tokyo area recycling centers
◤ Redirect business development efforts at existing recycling centers toward areas with higher margins
◤ Go after work related to large infrastructure construction projects (railroads, tunnels, etc.)
◤ Go after new brownfield restoration projects
Maintaining order pricing With soil decontamination work related to large-scale redevelopment projects slowing in some areas, demand for soil remediation-related services has been weak and competition to win orders for such work from general contractors has intensified. Because it is difficult for DES to secure a profit on the average project when the pricing environment is this competitive, it is trying instead to go after orders where it can command better margins. In an effort to win more profitable orders, DES will make tap into the large customer portfolio of parent company Daiseki to get referrals for project work, aggressively pursue projects that are too difficult for the average company in the soil remediation business to handle, and win packaged projects (construction and processing) that are beyond the capabilities of most small and medium sized operators.
With the demand environment for soil contamination analysis and remediation work improving, there are signs that pricing on soil remediation work is also on the mend. Much of the credit for the improvement goes to the recent amendments to the Soil Contamination Countermeasures Acts. Going into effect starting in April 2019, the new rules broaden the environmental reporting requirements for designated facilities where hazardous substances are used. Up until March 2019, reporting standards required soil analysis at defunct designated facilities where hazardous substances had been used in the past or, in the case of designated facilities where hazardous substances are currently being used, whenever there was a change in the character of a plot of land 3,000sqm or larger. With the recent changes in the law, starting in April 2019, environmental reports must be filed whenever there is a change in the character of a plot of land 900sqm or larger. At the very least, this change in reporting requirements is expected to lead to more demand for soil contamination analysis work and, depending on the results of those tests, follow-on demand for soil remediation work.
Increase capacity utilization rate at Yatomi Recycling Center The Yatomi Recycling Center, located in Aichi Prefecture, began soil cleaning operations in March 2017. Built at a cost of roughly JPY3.0bn (including JPY500mn for land), the soil processing facilities at the Yatomi Recycling Center has an annual processing capacity of 200,000 tons. From actual experience thus far, it has been verified that the Yatomi plant can efficiently decontaminate the sandy soil that is commonly found in the Kansai region; the problem is getting enough of the right kind of soil to the Yatomi facility for processing. The Yatomi facility processed just under 100,000 tons during FY02/19, less than needed to break even, and reported a loss of roughly JPY350mn for the year. DES is looking to boost the capacity utilization rate at Yatomi Recycling Center by coordinating with its other soil recycling centers to attract more of the kind of soil that can be efficiently processed at the Yatomi facility. DES aims to get processing volumes up to around 120,000 tons in FY02/20; that will still leave the Yatomi facility below the breakeven level of 140,000–150,000 tons, but will be enough for positive cash flow.
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Use of Yokohama-Ebisu Recycling Center DES started up operations at its Yokohama-Ebisu Recycling Center in January 2019. Built at a cost of roughly JPY5.0bn (including JPY2.6bn for land), the new facility can process up to 360,000 tons per annum. The Yokohama-Ebisu Recycling Center is distinguished by its loading/unloading facilities for ships, which makes it possible to receive big shipments that have traveled directly from factories via cargo ships. In contrast, its recycling center in nearby Namamugi has less processing capacity (300,000 tons), less land (which forces it to use third-party warehouses for storage), and no facilities for handling ships (which creates logistical problems).
Unlike the Yatomi Recycling Center, the Yokohama-Ebisu Recycling Center uses equipment based on proven technology and so its operating rate could be ramped up soon after the plant was started up. Moving forward, the Yokohama-Ebisu Recycling Center will use its logistical advantages to handle projects that require it to process large volumes at one time. The Namamugi recycling center, on the other hand, will mainly be used to go after special projects involving industrial waste like sludge and slag. At the Yokohama-Ebisu and Namamugi recycling centers, DES is looking to increase the combined processing volume from 250,000 tons in FY02/19 to 380,000 tons in FY02/20.
Going after soil remediation work from large-scale infrastructure construction projects The Gifu Recycling Center was permitted in March 2019. The total investment here will be about JPY3.0bn (including JPY500mn for land) for processing capacity of 300,000 tons per annum. Unlike other facilities, the soil cleansing process at the Gifu Recycling Center is designed to take out naturally occurring heavy metals. We note that the location of the new Gifu facility is near the interchange of the Tokai-Kanjo Expressway and the Chuo Expressway, and that DES has experience removing naturally occurring heavy metals (such as hexavalent chromium) from soil that has been displaced as a result of road-related tunneling work. Although management did not say definitively, Shared Research understands that the Gifu Recycling Center is aimed at capturing soil processing demand related to large-scale infrastructure construction projects in the region. Thus, we find DES putting processing capacity into place before the startup of full-scale tunneling work for the Linear Chuo Shinkansen Line that will run through Gifu Prefecture. The Gifu Recycling Center is expected to process roughly 60,000 tons in FY02/20.
Soil contamination treatment volume
450,000 Soil contamination treatment volume (incl. industrial waste) Cleanup (right axis) 45,000 400,000 40,000 350,000 35,000 300,000 30,000 250,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 0 (tons) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (tons) FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research, based on company data
Soil contamination treatment sales by region
3,000 Nagoya Kansai Tokyo Tohoku
2,500
2,000
1,500
1,000
500
0 (JPYmn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research, based on company data
Brownfield restoration business DES has completed the brownfield restoration project involving the former site of a factory in Yamanashi Prefecture that it acquired in March 2016 and, having finalized the sale of the site in 1H FY02/19, now has no new brownfield projects in progress.
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Because brownfield restoration projects allow DES to make use of its expertise in many areas (from soil and environmental analysis, to soil cleaning and processing, and site improvement work), this is a high value-added business, and one that the company is eager to pursue. The main problem is profitable opportunities of this kind are hard to find.
Plasterboard recycling business The plasterboard recycling business run by Green Arrows Chubu (GAC) and Green Arrows Kyushu (GAK) generated sales of JPY1.5bn (+2.5% YoY) and an operating profit of JPY299bn (+13.9% YoY) in FY02/19. Plasterboard recycling volumes were up at both companies, rising 7.4% YoY to 46,852 tons at GAC and 1.3% YoY to 31,216 tons at GAK. Sales of recycled solidifying agents were also good, with shipping volumes rising 5.2% YoY to 32,660 tons. DES sees its recycling business providing a firm underpinning to overall results again in FY02/20, with sales at GAC projected to rise 29.3% YoY to JPY1.3bn and sales at GAK projected to rise 3.3% YoY to JPY530mn.
Green Arrows Chubu (GAC) and Green Arrows Kyushu (GAK): plasterboard collection volumes (metric tons)
5,000 GAC (monthly) GAC (quarterly average) GAK (quarterly average) 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
- - (tons) Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 (tons) Source: Shared Research, based on company data
Plasterboard Plasterboard FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Est. Sales - - 659 732 769 1,191 1,320 1,483 1,514 1,828 GAC - - 662 732 769 814 782 959 1,001 1,298 GAK - - - 128 293 376 538 521 513 530 YoY - - - 11.1% 5.1% 54.8% 10.9% 12.4% 2.1% 20.7% GAC - - - 10.6% 5.0% 5.9% -3.9% 22.6% 4.4% 29.7% GAK ----128.9% 28.3% 43.1% -3.2% -1.5% 3.3% Operating profit - - 127 194 174 82 125 263 300 - YoY - - - 53.1% -10.4% -52.6% 51.2% 111.0% 14.0% - OPM - - 19.2% 26.5% 22.6% 6.9% 9.4% 17.7% 19.8% - EBITDA - - 223 267 256 356 394 487 489 - YoY - - - 19.7% -3.8% 38.8% 10.6% 23.7% 0.4% - EBITDA margin - - 33.8% 36.4% 33.3% 29.9% 29.8% 32.8% 32.3% - Capit al expenditures - - 97 134 583 409 104 45 275 Depreciation - - 96 72 82 274 269 224 189 Collection volume (tons) (a) 16,446 23,545 31,223 42,767 57,092 60,718 69,087 74,422 78,066 GAC 16,446 23,545 31,223 34,144 38,411 37,660 40,049 43,623 46,851 GAK ---8,623 18,681 23,058 29,038 30,799 31,215 YoY - 43.2% 32.6% 37.0% 33.5% 6.4% 13.8% 7.7% 4.9% GAC - 43.2% 32.6% 9.4% 12.5% -2.0% 6.3% 8.9% 7.4% GAK ----116.6% 23.4% 25.9% 6.1% 1.4% Sales / Collection volume (tons) 21.1 17.1 13.5 19.6 19.1 19.9 19.4 GAC 21.2 21.4 20.0 21.6 19.5 22.0 21.4 GAK 14.8 15.7 16.3 18.5 16.9 16.4 YoY -18.9% -21.3% 45.6% -2.5% 4.3% -2.7% GAC 1.2% -6.7% 8.0% -9.7% 12.6% -2.8% GAK -5.7%4.0%13.6%-8.7% -2.8% Source: Shared Research, based on company data
Big capital spending plans winding down After a long string of large capital spending projects, including the Yatomi Recycling Center, the Yokohama-Ebisu Recycling Center, and Gifu Recycling Center, the big capital spending projects at DES are winding down. Compared with JPY4.9bn in capital spending in FY02/19, DES is budgeting only JPY300mn for capital spending in FY02/20.
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Daiseki MCR
Daiseki MCR FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Est. Sales 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,848 2,910 YoY 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% 0.1% 2.2% Gross profit 615 380 373 617 475 -316 -196 313 21 420 GPM 19.0% 12.3% 13.4% 19.8% 15.2% -10.7% -9.1% 11.0% 0.7% 14.4% SG&A expenses 307 445 351 375 756 409 235 249 226 221 YoY 9.3% 45.0% -21.0% 6.7% 101.5% -45.9% -42.5% 6.0% -9.2% -2.2% SG&A ratio 9.5% 14.4% 12.6% 12.1% 24.1% 13.9% 10.9% 8.7% 7.9% 7.6% Operating profit 308 -65 22 242 -281 -725 -431 64 -205 199 YoY -45.0% --1,019.9% ------OPM 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% -7.2% 6.8% LME lead price (a) (USD/ton) 2,203 2,319 2,102 2,102 2,046 1,768 1,965 2,368 2,151 2,028 USD/JPY forex (b) (JPY) 86.5 79.0 81.9 99.6 108.2 120.8 108.4 111.4 110.5 110.0 (a) × (b) (JPY/kg) 191 183 172 209 221 214 213 264 238 223 YoY 6.9% -3.8% -6.0% 21.5% 5.8% -3.5% -0.3% 23.9% -9.9% -6.1% Lead price in Japan (JPY/kg) 238 234 224 270 281 274 271 323 301 - YoY 5.6% -1.5% -4.1% 20.1% 4.1% -2.4% -1.2% 19.4% -7.0% - Lead price a month earlier (c) 236 238 219 270 280 275 266 322 305 - YoY 8.1% 1.1% -8.0% 23.3% 3.8% -1.9% -3.2% 20.9% -5.3% - Sales / (c) 13.72 13.00 12.74 11.53 11.17 10.72 8.07 8.84 9.34 YoY -0.4% -5.2% -2.0% -9.5% -3.1% -4.0% -24.7% 9.5% 5.7% Source: Shared Research based on company data Changes in Basel Convention Act spur quick turnaround as domestic buying prices for used lead batteries come down At Daiseki MCR, the company is forecasting FY02/20 sales of JPY2.9bn (+2.2% YoY) and an operating profit of JPY199mn (versus year-earlier loss of JPY205mn). This follows a bad year in FY02/19, when sales finished flat as increases in used lead battery processing volumes and refined lead sales volumes were offset by a weak lead market that brought Daiseki MCR's unit selling prices down by roughly 10% YoY. Meanwhile, the domestic buying prices went up and stayed up as a result of aggressive bidding by Korean companies. Despite reducing new purchases and whittling down inventory levels, Daiseki MCR saw its margins squeezed hard and finished FY02/19 in the red with an operating loss of JPY205mn.
The operating environment for Daiseki MCR has taken a sharp turn for the better since the beginning of 2019, however, as domestic buying prices for used lead batteries have come down sharply as amendments to the Basel Convention Act have gone into effect. Historically, about half of the used lead batteries originating in Japan were exported to South Korea, but the changes in the Basel Convention Act were such that the once-common exports to South Korea have been effectively prohibited in practice. With this export channel closed, a flood of used lead batteries hit the domestic market, pushing down the price for buyers like Daiseki MCR. As a result, Daiseki MCR has increased its production volume by 20% since January and is also taking steps to speed up processing. Assuming an LME lead price of USD2,028/ton, the company is expecting Daiseki MCR to move back into the black in FY02/20.
Basel Convention Act: The Basel Convention Act regulates exports of designated hazardous materials; it was enacted to assure compliance with the standards set forth under the Basel Convention governing cross-border shipments of hazardous materials and their subsequent disposition. Following amendments to the Act in October 2018, the certification process to verify that exports of used lead batteries from Japan are in compliance with environmental protection standards has become much more difficult. As this certification is needed to gain approval based on the Minister for the Environment requirements before used lead batteries can be exported from Japan, it has made exporting used lead batteries to South Korea extremely difficult.
Lead price trends LME lead prices (JPY/kg) LME spot prices (right axis; USD/ton) 290 2,900
270 2,700
250 2,500
230 2,300
210 2,100
190 1,900
170 1,700
150 1,500 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Source: Shared Research, based on Bloomberg and Mizuho Bank data
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System Kikou System Kikou FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act.Act.Act.Act.Act.Act.Act.Act.Act.Est. Sales 961 2,539 2,244 2,963 3,145 2,800 2,061 2,627 2,229 2,600 YoY - 164.2% -11.6% 32.0% 6.1% -11.0% -26.4% 27.5% -15.2% 16.6% Gross profit 155 431 279 452 446 548 254 503 426 496 GPM 16.1% 17.0% 12.4% 15.3% 14.2% 19.6% 12.3% 19.1% 19.1% 19.1% SG&A expenses 172 309 374 331 307 360 320 285 312 294 YoY - 79.7% 21.0% -11.5% -7.3% 17.3% -11.1% -10.9% 9.5% -5.8% SG&A ratio 17.9% 12.2% 16.7% 11.2% 9.8% 12.9% 15.5% 10.8% 14.0% 11.3% Operating profit -17 122 -95 121 139 188 -66 218 114 202 YoY ----14.9%35.3%---47.7% 77.2% OPM -1.8% 4.8% -4.2% 4.1% 4.4% 6.7% -3.2% 8.3% 5.1% 7.8% Source: Shared Research, based on company data Still operating at close to full capacity For FY02/19, System Kikou reported sales of JPY2.2bn (-15.2% YoY) and an operating profit of JPY114mn (-47.7% YoY). With its mainstay businesses in oil tanks and plants cleaning and industrial piping installation running at nearly full capacity, System Kikou did not have any problems on the operations side. Sales and earnings finished down in FY02/19, as completion of many of the projects was carried over to FY02/20.
With System Kikou expected to continue operating at nearly full capacity in the year ahead, the company is forecasting a sharp turnaround in FY02/20, with sales rising 16.6% YoY to JPY2.6bn and operating profit rising 77.2% YoY to JPY202mn.
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Outlook
The company updates its three-year business plan every year, taking into consideration recent changes in the external operating environment, trends in demand and supply, and the challenges it is facing, and also reconsidering its approach to dealing with various challenges. In FY02/20, the company expects to report an operating profit of more than JPY10.0bn for the first time in its history and, starting in FY02/21, is looking to get its ROE over 10%.
Targets for consolidated sales and earnings under medium-term business plan Consolidated FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 FY02/22 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. MTP MTP MTP Prev. MTP Prev. MTP Prev. MTP Sales 44,232 49,185 51,313 53,500 56,500 58,500 50,200 53,000 56,500 YoY -12.9% 11.2% 4.3% 4.3% 5.6% 3.5% 2.1% 5.6% 6.6% Gross profit 12,367 14,484 15,189 16,200 17,300 18,000 15,050 15,800 17,150 YoY -5.5% 17.1% 4.9% 6.7% 6.8% 4.0% 3.9% 5.0% 8.5% GPM 28.0% 29.4% 29.6% 30.3% 30.6% 30.8% 30.0% 29.8% 30.4% SG&A expenses 5,247 5,707 6,082 6,100 6,100 6,300 5,950 5,700 5,950 YoY 0.2% 8.8% 6.6% 0.3% - 3.3% 4.3% -4.2% 4.4% SG&A ratio 11.9% 11.6% 11.9% 11.4% 10.8% 10.8% 11.9% 10.8% 10.5% Operating profit 7,120 8,777 9,107 10,100 11,200 11,700 9,100 10,100 11,200 YoY -9.3% 23.3% 3.8% 10.9% 10.9% 4.5% 3.7% 11.0% 10.9% OPM 16.1% 17.8% 17.7% 18.9% 19.8% 20.0% 18.1% 19.1% 19.8%
Daiseki Eco. Solutions FY02/17 FY02/18 FY02/19 FY02/20 FY02/21 FY02/22 FY02/19 FY02/20 FY02/21 (JPYmn) Act. Act. Act. MTP MTP MTP Prev. MTP Prev. MTP Prev. MTP Sales 14,373 14,926 14,193 14,712 15,885 16,746 15,010 16,650 19,230 YoY -24.7% 3.9% -4.9% 3.7% 8.0% 5.4% 0.6% 10.9% 15.5% Gross profit 2,696 2,659 2,365 2,501 2,859 3,349 2,870 3,281 4,063 YoY -25.2% -1.4% -11.1% 5.7% 14.3% 17.1% 7.9% 14.3% 23.8% GPM 18.8% 17.8% 16.7% 17.0% 18.0% 20.0% 19.1% 19.7% 21.1% SG&A expenses 1,188 1,320 1,467 1,601 1,629 1,829 1,415 1,502 1,536 YoY 9.4% 11.1% 11.1% 9.1% 1.7% 12.3% 7.2% 6.1% 2.3% SG&A ratio 8.3% 8.8% 10.3% 10.9% 10.3% 10.9% 9.4% 9.0% 8.0% Operating profit 1,508 1,339 898 900 1,230 1,520 1,455 1,779 2,527 YoY -40.1% -11.2% -32.9% 0.2% 36.7% 23.6% 8.6% 22.3% 42.0% OPM 10.5% 9.0% 6.3% 6.1% 7.7% 9.1% 9.7% 10.7% 13.1% Source: Shared Research based on company data Note: Previous medium-term plan announced April 2018
Assumptions Index Unit FY02/20 FY02/19 Assumption Act. Diff. Assumption Act. Diff. Cruide oil price WTI crude oil USD 55–60 60–65 63.2 Forex (USD/JPY) JPY 110.0 108.0 110.5 2% Lead price (per ton) LME lead USD 2,028 2,420 2,151 -11% Source: Shared Research based on company data Note: Previous medium-term plan announced April 2018
Medium-term business plan (Left: sales; Right: operating profit): looking for operating profit to top JPY10bn in FY02/20
(JPYｍn) (JPYｍn) Sales YoY Est. Operating profit YoY 60,000 60% 14,000 Est. 60%
50,000 45% 12,000 45%
10,000 30% 40,000 30% 8,000 15% 30,000 15% 6,000 0% 20,000 0% 4,000 -15%
10,000 -15% 2,000 -30%
0 -30% 0 -45% FY02/03 FY02/07 FY02/11 FY02/15 FY02/19 FY02/03 FY02/07 FY02/11 FY02/15 FY02/19 Source: Shared Research based on company data
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Medium-term business plans: changes in operating profit targets over time and actual results
12,000 Plans (3-years ago) Plans (2-years ago) Plans (a year ago) Act.
10,000
8,000
6,000
4,000
2,000
0 (JPYｍn) FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20Est. FY02/21Est. FY02/22Est. Source: Shared Research based on company data Operating profit forecast for FY02/20 and FY02/21 unchanged Following the release of FY02/19 results, the company updated its medium-term business plan, lowering its medium-term projections for Daiseki Eco. Solution while raising its outlook for the parent company. As before, the company is forecasting consolidated operating profit of JPY10.1bn for FY02/20 and JPY11.2bn for FY02/21. The newly added forecast for FY02/22 calls for operating profit of JPY11.7bn (+4.5% YoY). For ROE, the company is projecting 9.9% in FY02/20, 10.3% in FY02/21, and 10.1% in FY02/22. Key underlying assumptions include WTI crude prices of USD55–60 per barrel (versus USD60–65 previously), average exchange rate of JPY110/USD (versus JPY108/USD previously) and an LME lead price of USD2,028/ton (versus USD2,420/ton previously).
At the group level, the company is budgeting JPY11.4bn for capital spending in FY02/20 (including JPY8.0bn for the acquisition of land in Kansai) and expects capital spending to run between JPY3.0bn and JPY5.0bn a year in FY02/21 and FY02/22. The company said it is also considering buying land so it can build another processing facility in the Central Kanto area and, should a good opportunity arise, is also interested in buying land for brownfield restoration projects, but has not included such purchases of land in its current capital spending budget.
With regard to returns to shareholders, the company intends to maintain a dividend payout ratio of at least 30% and will consider increasing the dividend payout ratio should conditions allow. It does not intend to undertake any share buybacks at this time, but said it would consider a share buyback plan depending on liquidity conditions of its shares.
Daiseki (parent company) Following the results in FY02/19, the company is raising its outlook for parent company sales and earnings in FY02/20 and subsequent years. Starting in FY02/21, the revised forecast sees parent company sales growing at the rate of roughly JPY1.0bn per annum and parent company operating profit growing at the rate of JPY400–500mn per annum. Even though the company assumes domestic industrial production will be basically flat during this timeframe, it expects to increase industrial waste processing volumes with the help of further increases in its market share.
Daiseki Eco. Solution Reflecting the decline in pricing for soil remediation work, the company lowered outlook for sales and earnings at Daiseki Eco. Solution in FY02/20 and subsequent years. For FY02/21, the company is now projecting an operating profit of only JPY1.2bn (+36.7% YoY) versus its previous forecast of JPY2.5bn; for FY02/22, the company is projecting an operating profit of JPY1.5bn (+23.6% YoY). These projections assume that profitability will improve as processing volumes increase in FY02/21 and FY02/22.
Daiseki MCR Following a sharp turnaround in FY02/20, the company sees sales and earnings at Daiseki MCR logging slow-but-steady gains in FY02/21 and FY02/22.
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Long-term management vision "VISION 2030" (announced on June 29, 2018)
Along with the release of Q1 FY02/19 results on June 29, 2018, the company also unveiled its long-term management vision. Reflecting the growing societal concern about the environment and the sustainable development goals laid out in the United Nation's 2030 Agenda for Sustainable Development (adopted in September 2015), the company's long-term vision for 2030 is based on its company philosophy of contributing to society by creating a better environment. In this relation, the company also noted that October 1, 2018 will be the 60-year anniversary of its founding.
Dubbed “Vision 2030: Becoming the No. 1 recycling company in Asia,” Daiseki's long-term management vision for the year 2030 sets target sales of JPY150bn (3.0x vs. FY02/18), operating profit of JPY25bn (2.8x), and ROE of 15% (versus 9.9% in FY02/18). In order to meet these targets, the company has embarked on what it calls its “33 (San-San) Project.”
33 (San-San) Project: Aimed at making the company a shining example to the world by developing businesses in three main locations, establishing three new core businesses, capturing a 30% market share at its core domestic businesses, and tripling sales and operating profit from current levels.
33 (San-San) Project Under the 33 Project the company aims to triple sales and operating profit through the following means:
▷ Developing businesses in three main locations: planning to open three new Daiseki Co. facilities ▷ Establishing three new core businesses: aiming to add three new businesses with a scale of JPY10.0bn to the current core businesses (parent’s liquid waste processing and DES’ contaminated soil processing) ▷ Capturing a 30% market share at its core domestic businesses: aiming to raise the market share of the parent’s liquid waste processing business from just under 10% to 30%
Targets for each company are as follows:
▷ Daiseki Co. (sales of more than JPY70.0bn): grow market share to 30% ▷ DES (sales of more than JPY30.0bn): double sales at existing businesses ▷ Other subsidiaries (sales of more than JPY10.0bn): expand existing businesses ▷ New business areas (sales of more than JPY30.0bn): establish three new businesses with a scale of JPY10.0bn or more
To achieve the long-term vision, the basic strategy in existing business areas calls for the following:
▷ Japan: establish closer coordination between existing business offices to provide coverage for those areas where it has little presence, and develop new businesses as a means to gain entry to new areas ▷ Overseas: begin market research with the idea of moving into other markets in Asia ▷ Technology and equipment development: increase recycle rates and expand the range of goods handled by using new technology and new equipment ▷ Group strategy: increase synergies among group companies by increasing intra-group collaboration through personnel exchanges and other means
The basic strategy in new business areas calls for the following:
▷ M&A: undertake M&A to advance the themes "environment" and "recycle" ▷ Alliance strategy: increase business alliances, including alliances with companies in different industries
In terms of personnel development, the basic strategy is as follows:
▷ Work environment: create a work environment where workers feel fulfilled and want to grow, and where men and women work on equal terms
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▷ Human resources development: increase employee advancement opportunities through more employee exchanges among group companies, more extensive training programs, and the start of in-house competitions for spots on new project teams
The following are overviews by company.
Performance (JPYbn)
(JPYbn) (JPYbn) Daiseki Co. DES Other New key businesses Daiseki Co. DES OPM (right axis) ROE (right axis) 160 150 30 25 19.8 25 19.1 140 New businesses: 18.1 25 17.1 17.3 17.8 20 JPY30.0bn+ 16.0 16.1 15.7 15.0 15.4 120 16.7 Other group companies: 20 15.0 15 JPY10.0bn+ 100 9.9 7.9 DES: 15 7.3 7.1 7.6 7.0 7.4 10 6.4 11 80 JPY30.0bn+ 10 9 9 10 8 3 5 57 77 7 2 51 53 1 60 49 50 5 6 5 3 1 46 44 1 1 2 42 0 37 36 5 0 1 0 31 19 7 7 8 9 40 15 17 Daiseki Co.: 5 6 6 6 6 13 19 14 15 5 5 7 8 11 JPY70.0bn+ 20 5 0 -5 29 30 31 32 22 24 24 25 26 26 26 0 -5 -10 FY02/11 FY02/16 FY02/21 FY02/31 FY02/11 FY02/16 FY02/21 FY02/31 Source: Shared Research based on company data
Daiseki Co. As outlined in the 33 Project, Daiseki Co. will be in charge of adding new business sites, expanding market share, and establishing new businesses. To the six existing business sites—Nagoya (in charge of Chubu region), Kanto (located in Tochigi; in charge of entire Kanto region in coordination with Chiba), Chiba (focusing on recycled fuel), Kansai (located in Akashi, Hyogo; in charge of Kansai, Chugoku [Okayama, Tottori], and Shikoku regions), Kyushu (located in Kitakyushu, Fukuoka; in charge of Kyushu and Chugoku [Yamaguchi, Hiroshima, Shimane] regions), and Hokuriku (located in Ishikawa; in charge of the area from Akita to Kyoto)—the company plans to add three new business sites. It is already hurrying to acquire land to establish a new south Kanto facility to cover an area it has become difficult for the Kanto facility to cover, and is also planning to add two sites in west Japan. This is because the Kanto site is already operating in cramped conditions, with little room to expand sales (the company was targeting JPY6.0bn in sales at the time the facility was established, and FY02/18 sales hit JPY4.9bn), and the company aims to capture demand that currently falls between the Kansai and Kyushu sites. It then hopes to expand sales by increasing market share for the various facilities, including new ones, to around 30%, the same as the Nagoya facility.
In regard to establishing new business, Daiseki Co. says it already has one in the works, which it hopes to launch in FY02/22. The details are unclear, but it seems the company aims for regional development as with its core businesses, targeting sales of JPY10.0bn or more (perhaps targeting more than JPY1.0bn per site). The establishment of facilities will require investment (perhaps JPY2.0bn or more), but it is possible for the company to apply its own funds and profitability is likely to be high. The other two businesses are still in the planning stages, but the project is set to run through FY02/31, so for now we would like to watch progress on the first new business.
DES DES has repeatedly stated that it hopes to derive more than fifty percent of sales from businesses other than soil contamination research and cleanup (which accounted for 84% in FY02/18). DES has not yet released its own long-term management vision, but the vision apparently calls for doubling sales to more than JPY30.0bn at existing businesses (including the plasterboard recycling business) and little else.
In regard to existing businesses, the Linear Chuo Shinkansen Line (bullet train) is set to start operating between Tokyo and Nagoya in 2027, and the opening of the full line through to Osaka, originally scheduled for 2045, may be moved up by as much as eight years (with a new target of 2037) through the use of government investment and loans. DES aims to establish two new sites by end FY02/19. First of all, Shared Research would like to focus on whether DES can capture large projects that will allow it to maintain high operating rates.
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Other subsidiaries, M&A, etc. In regard to other subsidiaries, Daiseki Co. basically appears to be expecting growth through the expansion of existing businesses. As before, it also plans to actively conduct M&A where synergies with its own businesses can be anticipated. It will proceed with alliances—such as an alliance between DES and Yoshino Gypsum Co., Ltd., to develop the plasterboard recycling business—but appears to be giving mergers priority. There is a significant difference in OPM between the two core companies, Daiseki Co. (24.9% in FY02/18) and DES (9.0%). Whereas Daiseki Co. is targeting OPMs of at least 10% for possible M&A targets, it does not appear to be necessarily seeking only companies with high profitability. It says the number of M&As is increasing in FY02/19. It appears the intention is to take advantage of disposal by sale under favorable conditions as the industry environment improves.
In addition, as part of efforts to develop human resources, the company will launch an in-house recruitment system as a new project in 2H. This being its first such attempt, it is unknown what the response will be, but Shared Research expects new businesses can be born from the collective wisdom of its employees.
ROE and shareholder returns The company says the ROE target of 15% was calculated based on the projected tax rate for the final year of the medium-term plan and an assumed dividend payout ratio of 30%. A trial calculation puts the outlook for ROE at 12%. Looking at ROE (net income divided by average of shareholder equity at beginning and end of financial year), since the numerator is calculated from operating profit of JPY25.0bn, it is necessary to reduce equity, which serves as the denominator. Possible measures to achieve this are either raising the dividend payout ratio or purchasing treasury stock. Based on past trends at the company, Shared Research believes the former is more likely.
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Business
Business description
Daiseki is an environmental specialist focusing on recycling industrial waste. The main business for the parent company is intermediate processing of liquid waste (waste oil, wastewater, sludge) and separation into reusable components that are then resold. Subsidiaries include Daiseki Eco. Solution Co., Ltd. (TSE1: 1712; 54% stake held by Daiseki), which offers soil decontamination and plasterboard recycling services; Daiseki MCR, which refines and sells lead recovered from used batteries; and System Kikou, which provides cleanup services for large oil tanks and also does industrial piping installation.
Main segments
The company has one division: Environmental Division. The company’s main activities are processing (recycling) of industrial waste and services related to contaminated soil. Waste processing is the company’s core competence and earnings driver. Daiseki Co., which is mainly involved with industrial waste processing (recycling), is the overwhelming contributor to company performance. Daiseki group companies have the following functions;
Daiseki consolidated earnings and earnings by subsidiary FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Cons. Sales 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 51,313 YoY 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 4.3% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,107 YoY 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 23.3% 3.8% OPM 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 17.7% Recurring profit 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 9,199 RPM 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% 17.9% Net income 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,110 YoY 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4% 41.2% 4.7% Net margin 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% 11.9% FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 17年2⽉期 FY02/18 FY02/19 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Daiseki Co. Sales 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 32,127 (parent) YoY 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 11.6% Operating profit 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 8,294 YoY 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7% 16.8% 15.7% OPM 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 25.8% Daiseki Sales 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 14,193 Eco. YoY -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% -4.9% Solution Operating profit 128 408 592 1,298 1,226 2,517 1,508 1,339 898 YoY -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% -33.0% OPM 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 6.3% Daiseki Sales 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,848 MCR YoY 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% 0.1% Operating profit 308 -65 22 242 -281 -725 -431 64 -205 YoY -45.0% - - 1,019.9% - - - - - OPM 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% -7.2% System Sales 961 2,539 2,244 2,963 3,145 2,800 2,061 2,627 2,229 Kikou YoY - 164.2% -11.6% 32.0% 6.1% -11.0% -26.4% 27.5% -15.2% Operating profit -17 122 -95 121 139 188 -66 218 114 YoY - - - - 14.9% 35.3% - - -47.7% OPM -1.8% 4.8% -4.2% 4.1% 4.4% 6.7% -3.2% 8.3% 5.1% Source: Shared Research based on company data FY02/08 figures for Daiseki MCR based on a nine-month financial year. FY02/11 figures for System Kikou based on a six-month financial year.
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The Daiseki Group (April 2016)
Source: Shared Research based on Daiseki Eco. Solution data
Industrial waste processing “Industrial waste” is defined as waste created as a byproduct of any industrial process (vs. generated by individuals). Japan classifies particularly harmful or hazardous waste as “special control industrial waste” (can contain toxins or other dangerous compounds). After it has been generated, industrial waste travels through three phases: collection and transportation, intermediate treatment (processing to remove any dangerous components), and disposal (final materials are re-introduced to the environment in a non-threatening state). The main activities of the Environmental Division are the first two stages: collection and intermediate treatment.
The general approach to handling industrial waste is making it as small as possible before final disposal (landfills, typically). This can be achieved in multiple ways, typically involving crushing, burning, or shredding; burning is the most popular method in Japan. Daiseki specializes in treating liquid industrial waste (such as sludge, waste oil, waste water and special control industrial liquid wastes), but also provides some solid waste recycling (specifically automobile and industrial batteries) through subsidiary Daiseki MCR. Daiseki’s approach to waste processing is to recycle as much as possible, and it has developed technological expertise to capture reusable components. Daiseki does not use incinerators at any of its facilities.
Daiseki Co.’s recycling rate Daiseki Co. FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 ('000 tons) Industrial waste collection 854 868 909 953 970 974 1,000 1,090 Recycled fuels 176 188 192 203 217 227 254 267 Recycled materials 147 160 193 210 222 237 244 249 Recycling rate 1 (recycled volume basis) 79.2% 79.5% 80.9% 81.4% 83.6% 85.3% 87.5% 82.6% Recycling rate 2 (waste disposal basis) 89.6% 89.6% 90.0% 90.1% 91.1% 91.8% 92.9% 90.0%
Recycling rate 1 (recycled volume basis) Recycling rate 2 (waste disposal basis) 95% 90% 87.5% 85.3% 83.6% 85% 82.5% 81.9% 82.6% 80.5% 80.9% 81.4% 79.2% 79.5% 80% 77.6% 75% 73.0% 70% 68.5% 65% 62.8% 60.0% 60% 55% FY2/03 FY2/04 FY2/05 FY2/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18
Source: Shared Research based on company data Recycling rate 1: Recycled volume ÷ (Recycled volume + Outsourced intermediate treatment residues (not recycled) Recycling rate 2: (Waste - Outsourced intermediate treatment residues (not recycled)) ÷ Waste
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The breakdown of waste and other materials (10 million tons) processed by Daiseki (parent basis) in FY02/18:
▷ Waste oil: 32% ▷ Waste alkali: 24% ▷ Waste acid: 17% ▷ Sludge: 23%
Waste oil processing can take three main forms, based on the type of oil to be processed and desired output.
◤ Lubricant oil. Impurities, degraded oil components, and other contaminants are filtered out of the oil, with only lubricant oil remaining for resale.
◤ Recycling into fuel oil. Waste oil is treated to separate oil, water, and other particles, resulting in waste water (processed separately), sludge (semi-solid mixture of particles, also processed separately), and oil - free of contaminants and ready for sale as fuel.
◤ Supplementary fuel. Waste oil that can’t be recycled into lubricant or fuel oil undergoes a process (additional ingredients, etc.) rendering it fit for use as a secondary fuel (to be burned as a coal alternative or supplement).
Wastewater processing refers to the separation of water from oil and other contaminants. It’s a key step in the company’s other waste recycling activities (oil, sludge). Processing involves three steps:
◤ Any oil in the mixture is separated, processed as waste oil, and made into fuel.
◤ Collected waste water undergoes neutralization process followed by coagulation and dehydration. It is then biologically treated with activated sludge and released into river or municipal sewage system.
◤ The sludge resulting in the process of neutralization is dehydrated (dewatered), leaving a solid cake-like material which is recycled as a cement raw material.
Specific steps for sludge processing depend on the contents (sludge from construction activities is different from industrial sludge). After analysis and classification, different treatment options are:
▷ Mixing in additional compounds to create supplementary fuel. ▷ Dehydration to separate water and solid material (typically destined for cement manufacturers). ▷ Kneading in chemical compounds to transform the sludge into raw material for cement manufacturers.
Processing can involve an additional step: reclaiming certain recyclable matter, depending on the source and contents of the sludge.
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Soil decontamination
Soil decontamination: Daiseki Eco. Solution Daiseki Eco. Solution FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Soil contamination research and cleanup 5,046 7,001 6,556 9,500 11,520 16,966 12,123 12,529 11,789 YoY -25.7% 38.7% -6.4% 44.9% 21.3% 47.3% -28.5% 3.3% -5.9% Soil research Research sales 516 387 437 370 Number of research cases 455 559 580 553 Research sales per case 1.1 0.7 0.8 0.7 YoY 59.2% -39.0% 8.8% -11.2% Soil cleanup Soil cleanup sales 4,530 6,614 6,118 9,129 Number of soil cleanup cases 891 1,130 1,254 1,326 Soil cleanup sales per case 5.1 5.9 4.9 6.9 YoY -29.7% 15.1% -16.6% 41.1% Cleanup volume ('000 tons) 391.8 602.9 534.9 660.2 818.9 1,090.1 843.5 910.0 804.3 YoY -16.7% 53.9% -11.3% 23.4% 24.0% 33.1% -22.6% 7.9% -11.6% Cleanup sales per volume (JPY'000/ton) 11.6 11.0 11.4 13.8 YoY -16.3% -5.1% 4.3% 20.9% Research and cleanup sales per volume (JPY'000/ton) 12.9 11.6 12.3 14.414.115.614.413.814.7 YoY -10.7% -9.8% 5.5% 17.4% -2.2% 10.6% -7.7% -4.2% 6.5% Source: Shared Research, based on company data
The Daiseki group's soil decontamination business is run by subsidiary Daiseki Eco. Solution. The business includes soil and environmental analysis, and soil recycling facilities to process contaminated soil. Standard environmental analysis must be done whenever factories are closed or moved (to verify that no contaminants have been left behind) and also whenever land is being redeveloped. With soil recycling centers in Nagoya, Yokohama, and Osaka, Daiseki Eco. Solution can process up to 1.0mn tons of soil a year.
Daiseki Eco. Solution has a number of different processes for handling contaminated soil, including recycling (which removes components from contaminated soil that can then be sold as base materials to cement manufacturers), hot soil remediation (removing contaminants using heat exposure at its Nagoya facility), and on-site remediation (decontaminating soil without extracting it).
Lead recycling Daiseki MCR FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Sales 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,848 YoY 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% 0.1% Gross profit 615 380 373 617 475 -316 -196 313 21 GPM 19.0% 12.3% 13.4% 19.8% 15.2% -10.7% -9.1% 11.0% 0.7% SG&A expenses 307 445 351 375 756 409 235 249 226 YoY 9.3% 45.0% -21.0% 6.7% 101.5% -45.9% -42.5% 6.0% -9.2% SG&A ratio 9.5% 14.4% 12.6% 12.1% 24.1% 13.9% 10.9% 8.7% 7.9% Operat ing profit 308 -65 22 242 -281 -725 -431 64 -205 YoY -45.0% --1,019.9% - - - - - OPM 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% -7.2% LME lead price (a) (USD/ton) 2,203 2,319 2,102 2,102 2,046 1,768 1,965 2,368 2,151 USD/JPY forex (b) (JPY) 86.5 79.0 81.9 99.6 108.2 120.8 108.4 111.4 110.5 (a) × (b) (JPY/kg) 191 183 172 209 221 214 213 264 238 YoY 6.9% -3.8% -6.0% 21.5% 5.8% -3.5% -0.3% 23.9% -9.9% Lead price in Japan (JPY/kg) 238 234 224 270 281 274 271 323 301 YoY 5.6% -1.5% -4.1% 20.1% 4.1% -2.4% -1.2% 19.4% -7.0% Lead price a month earlier (c) 236 238 219 270 280 275 266 322 305 YoY 8.1% 1.1% -8.0% 23.3% 3.8% -1.9% -3.2% 20.9% -5.3% Sales / (c) 13.72 13.00 12.74 11.53 11.17 10.72 8.07 8.84 9.34 YoY -0.4% -5.2% -2.0% -9.5% -3.1% -4.0% -24.7% 9.5% 5.7% Source: Shared Research based on company data
The lead recycling business is the main focus of Daiseki MCR. Most of the batteries are from automobiles, the others mostly from industrial equipment like backup generators, telecommunication equipment, etc. Processing involves separating lead from other parts of the battery (such as plastic and internal liquid), most of which can be recycled. The liquid waste (acidic wastewater) is processed and treated. Lead and plastic are then resold.
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The company estimates Daiseki MCR’s share at approximately 5% of the domestic market. The new plant going into full-scale operation in FY02/16 led to capacity expansion. As there is room for an additional rotary furnace in the new plant, the company is taking measures for further capacity expansion. Unlike the main waste recycling business, battery recycling is not seasonal. On the other hand, battery recycling is prone to the changes in inventor due to fluctuations in lead prices and the gross profit margin.
Tank cleaning The company via its System Kikou unit offers cleaning services for large tanks, pipes and various plant facilities. It has developed a washing technology for large oil tanks called COW (Crude Oil Washing) that is improved from traditional manual methods for cleaning tanks, and as of FY02/13 System Kikou boasted nearly 60% of the large tank washing market in Japan.
System Kikou became a fully owned subsidiary in September 2010 and the company expects to be able reap the following synergies from the unit:
◤ System Kikou will complement Daiseki's small and medium-sized fuel storage tank washing business.
◤ System Kikou will be able to offer VOC gas recovery services (collection of large quantities of VOC gases which are released while large tanks are open) to Daiseki's existing customers (electric power companies, iron producers, etc.).
◤ Daiseki Co. will be able to recycle sludge produced by System Kikou’s tank cleaning into fuel.
◤ Daiseki Eco. Solution will be able to carry out soil contamination surveys and treatment on sites after removing old oil tanks.
◤ System Kikou should see its overseas business strengthen, either by exporting cleaning equipment to China and oil-producing countries, or by providing large-tank cleaning services directly in those markets.
Main facilities Daiseki parent has six main recycling facilities, located near the major industrial areas (Kanto, Chubu, Kinki, and Kyushu). All facilities are ISO 14001 certified and licensed to recycle and treat major types of industrial waste. FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Sales 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 32,127 Nagoya6,986 7,705 7,487 7,881 8,233 7,962 7,761 8,937 9,289 Hokuriku 2,834 2,781 2,793 3,104 3,197 3,249 2,955 3,303 3,845 Kansai 3,985 4,147 4,142 4,190 4,434 4,332 4,188 4,909 5,546 Kyushu 3,312 3,448 3,597 3,915 4,236 4,356 4,651 4,836 5,567 Kanto 4,040 5,170 5,045 5,157 5,424 5,344 5,357 5,904 6,825 Chiba 698 756 742 825 933 769 832 888 1,052 YoY 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 11.6% Nagoya 7.7% 10.3% -2.8% 5.3% 4.5% -3.3% -2.5% 15.2% 3.9% Hokuriku 20.9% -1.9% 0.4% 11.1% 3.0% 1.6% -9.0% 11.8% 16.4% Kansai 15.1% 4.1% -0.1% 1.2% 5.8% -2.3% -3.3% 17.2% 13.0% Kyushu 17.0% 4.1% 4.3% 8.8% 8.2% 2.8% 6.8% 4.0% 15.1% Kanto 16.4% 28.0% -2.4% 2.2% 5.2% -1.5% 0.2% 10.2% 15.6% Chiba 14.4% 8.3% -1.9% 11.2% 13.1% -17.6% 8.2% 6.7% 18.5% % of sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Nagoya 32.0% 32.1% 31.4% 31.4% 31.1% 30.6% 30.1% 31.1% 28.9% Hokuriku 13.0% 11.6% 11.7% 12.4% 12.1% 12.5% 11.5% 11.5% 12.0% Kansai 18.2% 17.3% 17.4% 16.7% 16.8% 16.7% 16.3% 17.1% 17.3% Kyushu 15.2% 14.4% 15.1% 15.6% 16.0% 16.7% 18.1% 16.8% 17.3% Kanto 18.5% 21.5% 21.2% 20.6% 20.5% 20.5% 20.8% 20.5% 21.2% Chiba 3.2%3.1%3.1%3.3%3.5%3.0%3.2%3.1%3.3% Source: Shared Research based on company data
The company’s plants are highly accessible by major transport links; additionally, four of the company’s six main facilities (Kyushu, Kansai, Hokuriku, and Chiba) are directly accessible by water.
◤ Nagoya recycling works—opened in 1963 (oldest facility), handles the most waste in the company’s facility network (quantity and variety). Serves the Chubu area (processed 16.6% of total industrial waste in FY10).
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◤ Kansai recycling works—opened in 2002; wastewater, waste oil, and sludge capabilities. Serves the Kinki area (processed 14.3% of total industrial waste in FY10).
◤ Kyushu recycling works—opened in 1982; equipped to handle both liquid waste and sludge. Serves the Kyushu area (processed 14.3% of total industrial waste in FY10).
◤ Hokuriku recycling works—opened in 1973; handles multiple types of industrial waste (liquids, some solids such as glass and concrete). Along with the Nagoya recycling works, serves the Chubu area.
◤ Kanto recycling works—opened in 1990; equipped to recycle liquid and some solid waste. Serves the Kanto area (processed 25.6% of total industrial waste in FY10).
◤ Chiba recycling works—opened 1997; focuses on oil recycling. Along with the Kanto recycling works, serves Kanto.
The average facility cost for industrial waste processing is about 1 billion yen (with smaller facilities costing from 500 million yen and larger–up to 2 billion yen). Facilities are typically profitable within the first three years of use; with a payback period of less than seven years (15-18% ROI). The company uses the payback period as a decision-making criterion.
Daiseki Eco. Solution Facilities Recycling centers (soil contamination treatment) in Nagoya, Yokohama, Osaka, and Sendai, and Yatomi (Aichi Pref.); Nagoya Transshipment Center in Nagoya for temporary storage of PCB (online in June 2015); and Bioenergy Center in Nagoya for recycling waste oil into BDF (online in March 2012). In March 2017, the company established the cleaning facility Yatomi Recycling Center (Aichi Prefecture), and opened two new facilities in Gifu and Yokohama in 2019.
In addition, subsidiary Green Arrows Central has two plasterboard recycling plants in Nagoya (one of which, specializing in producing solidifying agents, went online in April 2015) and another subsidiary Green Arrows Kyushu has a plasterboard recycling plant in Fukuoka (addition of a second production line in August 2015).
Daiseki MCR Facilities Headquarters and factories in Tochigi prefecture
System Kikou facilities Tomakomai, Kanto, Chubu, Kansai, Shikoku are operation centers and Yokkaichi is a materials center
Research and development Daiseki parent has R&D facilities in its entire works; research focuses on improving the recycling (recovery) technology and expansion of treatment methods for handling complex industrial waste. The facilities employ many graduates of universities and graduate schools of chemistry.
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Business model
The main components of sales are recycling and waste processing (minor revenue streams include product sales in the petroleum products business). Prices that Daiseki parent charges for recycling vary for each client, and are largely based on treatment costs (easily recyclable materials cost less). Due to the individual characteristics of manufacturers’ waste, the company doesn’t have a general price list; contract prices are negotiated case by case. Once set, processing prices are changed infrequently (vs. the company’s petroleum products, which are influenced by market prices of oil). According to the company, recycling prices had broadly been increasing from about 2005 until the 2008 global financial crisis (waste becoming increasingly complex). Post financial crisis, prices have declined about 7%, but have stabilized to some extent.
Number of Daiseki accounts
7,000 1,200 Full-year No. of new accounts (right axis) 6,453 6,352 6,268 6,013 6,000 5,826 800 658 5,693 5,715 769 789 777 608 795 698 5,407 690 5,256 673 664 617 626 634 584 5,072 5,123 4,953 5,000 400 4,691 4,742
4,000 0 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data Note: Number of accounts: accounts that generated revenue during the year under review
The company has been growing its market share consistently. (See the graph above.) The company attributes its success to four factors: price (processing price varies depending on the types of wastes), reliability (strict environmental laws in Japan hold manufacturers responsible to the point of final disposal, making hiring a reliable waste disposal company a necessity), convenience (fast response), and recycling per se (reputation and similar intangible benefits; e.g., manufacturers seeking ISO process certification benefit from participating in waste recycling).
Industrial production and Daiseki Co. sales Daiseki Co. sales (Nagoya, Hokuriku) (JPYmn) (JPYmn) Daiseki Co. sales (ex. DES) Industrial prod. index (right axis) Industrial prod. index: Chubu (right axis) 3,500 Transportation equip. industry (Chubu; right axis) 140 8,000 160 130
7,000 140 3,000 120 110 6,000 120 2,500 100 90 5,000 100 2,000 80 4,000 80 70 1,500 60 3,000 60 50 2,000 40 1,000 40 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17
(JPYmn) Daiseki Co. sales (Kansai) (JPYmn) Daiseki Co. sales (Kanto, Chiba) (JPYmn) Daiseki Co. sales (Kyushu) 1,600 140 2,400 140 1,600 140 Industrial prod. index: Kinki (right axis) Industrial prod. index: Kanto (right axis) Industrial prod. index: Kyushu (right axis)
1,400 120 2,100 120 1,400 120
1,200 1,800 1,200 100 100 100 1,000 1,500 1,000 80 80 80 800 1,200 800 60 60 60 600 900 600 40 40 40 400 600 400
200 20 300 20 200 20
0 - 0 - 0 - Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 FY02/01 FY02/05 FY02/09 FY02/13 FY02/17 Source: Shared Research based on company data, Ministry of Economy, Trade and Industry
The main driver of the revenues is industrial production levels—recycling volumes that drive revenues directly depend on the amount of waste that industry generates. Volumes lag behind industrial production by approximately three to six months, especially during the recovery phase. One reason is that manufacturers tend to ship in fewer lots during recessions, producing less waste and holding more waste at their facilities to minimize transportation costs––leading to an initial lag in waste shipment when recovery starts.
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Other minor revenue drivers include market prices for lead and petroleum (Daiseki MCR sells recycled lead ingots at market prices trailing by one month and petroleum products are directly influenced by oil prices). Daiseki MCR doesn’t hedge price risk for lead due to the relative illiquidity in the commodity market and the cost of hedging.
Cost structure
Costs are mostly fixed, the largest being labor. Gross profit margins for industrial waste production are relatively stable at just over 35% (variable costs are mainly chemicals and other treatments such as incineration or landfill costs, also transportation costs).
Daiseki’s revenues are driven by volume of processed waste, and profitability is driven by facility utilization rates. The company estimates that a ‘best case’ scenario of full utilization would result in OPMs (at the parent basis) in the area of 30%.
Two variables define the company’s existing business growth: increases in either processing volume driven by an upswing in industrial production or market share. The company has been taking share from local competitors who either use less sophisticated processing methods (emphasizing the cost and other benefits of recycling vs. burning) or have insufficient scale to provide regulatory compliance with changing legislation.
Group companies
◤ Daiseki: main group company, engaged in intermediate treatment of industrial waste.
◤ Daiseki Eco. Solution (TSE 1712): specializes in soil contamination: surveys, analysis, and treatment. The company has two subsidiaries for the treatment and recycling of plasterboard (Green Arrows Central and Green Arrows Kyushu).
◤ Hokuriku Daiseki: manufactures and sells lubricant oil and other petroleum products.
◤ Daiseki MCR: refines lead recovered from batteries for resale.
◤ System Kikou: washing large fuel tanks and associated pipework and plant equipment.
Group strategy
The company’s strategy has been to develop as a specialist environmental group, with industrial waste recycling at the core. Subsidiary businesses are closely aligned to the core recycling business. Daiseki parent and Hokuriku Daiseki buy petroleum products from each other; Daiseki MCR generates wastewater (battery fluid) which is processed by Daiseki; and Daiseki Eco. Solution captures environmental response projects from currently active manufacturing plants thanks to close cooperation with Daiseki parent. Residues produced during System Kikou’s tank-cleaning operations are processed by Daiseki Co. The group structure is appropriate for the company due to the alignment of input and output materials from the different businesses.
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Strengths and weaknesses
Strengths
◤ Reputation built on experience, status as listed company. Daiseki has been involved in industrial waste processing and recycling for nearly 40 years. Typically experience alone in an industry isn’t a strength, as any company that has managed to survive can cite “experience” as an attribute. In industrial waste processing, however, experience and a solid reputation are important. Waste producers are liable for their waste until its final disposal, making the choice of a processing company an important one (if a disposal company does anything improper, the manufacturer could be subject to fines, legal action, etc.). Daiseki’s approach minimizes this risk for companies, and its experience in processing different waste types means its services can be used by different industries. The compliance system Daiseki has to abide by as a listed company also goes a long way toward engendering trust among clients.
◤ Pragmatic management focused on medium-term earnings growth. In Shared Research's view, this helps, if not drives, high profitability as the company has avoided expanding too rapidly–focusing instead on steadily gaining market share and building client relationships. This translates directly into shareholder value and substantially lower cost of capital, creating a cycle of high returns and steady growth.
◤ Specialist focus on liquid waste (the parent company). Daiseki operates in a narrow niche where it can leverage technical expertise and the trust and name-recognition stemming from its position as a TSE-listed company to maximize its competitive advantage. It has been applying the same approach to other areas, buying other specialist firms and combining their focus with Daiseki’s core strengths to grow.
Weaknesses
◤ Market bound by mining and manufacturing production. Daiseki’s business is bound by domestic mining and manufacturing production––the number and output of manufacturing companies (a mature and shrinking market). Although Daiseki has taken share from competitors in the past, this is not guaranteed in the future.
◤ Permits for new plants and expansion of existing plants can take a long time. When it comes to making new investment in processing plants, permitting alone can take a long time. This naturally adds to the uncertainty surrounding the return on investment, since the operating environment could change while the company is waiting for its application to be approved. And while the difficulty of building up a business quickly (except through M&A) is a barrier to entry, it must also be counted as one of Daiseki's weaknesses.
◤ Limited available M&A opportunities. The company says that most M&A opportunities presenting themselves involve rescuing troubled companies and are generally unattractive. This limits growth opportunities to organic growth and may lead to less efficient use of the balance sheet. The company’s ROE and ROA have been nearly equivalent due in part to the fact that about 1/3 of total assets were kept in cash as of FY02/19, sitting on the sidelines waiting for the next capex increase or a low probability M&A event.
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Market and value chain
Market overview
The key market for Daiseki is industrial waste processing in Japan. Industrial waste in Japan is classified in two main categories: industrial waste (a broad term for waste created through commercial activity; examples include wood chips, paper, textiles, and organic waste), and special control industrial waste (hazardous waste which requires special treatment, such as oil, acid, medical waste, asbestos, and waste with toxic heavy metals like mercury and cadmium). Generally speaking, processing special control industrial waste requires more sophisticated techniques than less dangerous forms of waste.
Creation of industrial waste is driven by industrial activity.
Industrial waste emissions: breakdown by industry Waste by industry FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 5 year 10 year ('000 tons) CA GR CA GR Total 419,425 403,661 389,746 385,988 381,206 379,137 384,642 392,840 391,185 387,035 Electricity, gas, water supplies 95,810 96,283 96,371 95,572 95,576 96,473 97,936 101,032 100,543 100,444 Agriculture 87,811 87,974 88,410 85,090 84,710 85,721 82,963 81,902 80,949 80,901 Construction 77,253 76,465 73,640 73,211 75,395 74,124 80,348 81,614 81,845 80,755 Pulp, paper, paper products 35,479 33,583 34,170 33,405 29,895 28,996 30,441 32,612 31,761 31,320 Steel 38,265 31,955 24,898 28,634 28,249 28,655 30,755 28,637 29,757 27,235 Chemicals manufacturing 17,578 14,216 13,253 13,890 13,373 12,193 12,807 11,896 9,974 9,619 Mining 12,509 12,866 13,865 11,577 10,466 9,481 8,785 9,086 9,766 8,470 Ceramics & pottery manufacturing 10,097 8,529 8,510 8,987 8,779 7,129 7,603 8,941 9,348 9,525 Food processing 9,811 9,041 9,135 8,524 8,626 8,484 8,650 9,178 9,096 9,556 Electronics machinery 5,149 4,823 4,067 4,339 4,106 3,625 3,341 4,061 3,657 Others 29,663 27,926 23,427 22,759 22,031 24,256 21,013 23,881 24,489 29,209
YoY 0.2% -3.8% -3.4% -1.0% -1.2% -0.5% 1.5% 2.1% -0.4% -1.1% 0.3%-0.8% Electricity, gas, water supplies -1.3% 0.5% 0.1% -0.8% 0.0% 0.9% 1.5% 3.2% -0.5% -0.1% 1.0%0.3% Agriculture -0.1% 0.2% 0.5% -3.8% -0.4% 1.2% -3.2% -1.3% -1.2% -0.1% -0.9% -0.8% Construction -0.4% -1.0% -3.7% -0.6% 3.0% -1.7% 8.4% 1.6% 0.3% -1.3% 1.4%0.4% Pulp, paper, paper products 4.7% -5.3% 1.7% -2.2% -10.5% -3.0% 5.0% 7.1% -2.6% -1.4% 0.9%-0.8% Steel -0.3% -16.5% -22.1% 15.0% -1.3% 1.4% 7.3% -6.9% 3.9% -8.5% -0.7% -3.4% Chemicals manufacturing 2.1% -19.1% -6.8% 4.8% -3.7% -8.8% 5.0% -7.1% -16.2% -3.6% -6.4% -5.7% Mining -10.3% 2.9% 7.8% -16.5% -9.6% -9.4% -7.3% 3.4% 7.5% -13.3% -4.1% -4.9% Ceramics & pottery manufacturing 5.2% -15.5% -0.2% 5.6% -2.3% -18.8% 6.7% 17.6% 4.6% 1.9% 1.6% -0.1% Food processing 0.9% -7.8% 1.0% -6.7% 1.2% -1.6% 2.0% 6.1% -0.9% 5.1% 2.1% -0.2% Electronics machinery 8.0% -6.3% -15.7% 6.7% -5.4% -11.7% -7.8% 21.6% -9.9% Others 4.2% -5.9% -16.1% -2.8% -3.2% 10.1% -13.4% 13.6% 2.5% 19.3% 2.2% -1.3% Source: Shared Research, based on data from Ministry of the Environment
In terms of specific materials in industrial waste processing, the largest single component has historically been sludge (see table below).
Industrial waste emissions: breakdown by type Types of material FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 5 year 10 year (mn tons) CA GR CA GR Total 419,425 403,661 389,746 385,988 381,206 379,137 384,642 392,840 391,185 387,035 Liquid 12,050 8,985 7,457 8,297 7,759 7,586 7,933 8,541 8,456 8,137 Plastic 6,428 6,445 5,665 6,185 5,710 5,691 6,120 6,509 6,823 6,836 Sludge 185,305 176,114 173,629 169,885 166,132 164,638 164,169 168,821 169,318 167,316 Other 215,642 212,117 202,995 201,621 201,605 201,222 206,420 208,969 206,588 204,746 YoY 0.2% -3.8% -3.4% -1.0% -1.2% -0.5% 1.5% 2.1% -0.4% -1.1% 0.3% -0.8% Liquid 6.0% -25.4% -17.0% 11.3% -6.5% -2.2% 4.6% 7.7% -1.0% -3.8% 1.0% -3.3% Plastic 5.5% 0.3% -12.1% 9.2% -7.7% -0.3% 7.5% 6.4% 4.8% 0.2% 3.7% 1.2% Sludge -0.0% -5.0% -1.4% -2.2% -2.2% -0.9% -0.3% 2.8% 0.3% -1.2% 0.1% -1.0% Other -0.0% -1.6% -4.3% -0.7% -0.0% -0.2% 2.6% 1.2% -1.1% -0.9% 0.3% -0.5% Types of liquid FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 5 year 10 year (mn tons) CA GR CA GR Total 12,050 8,985 7,457 8,297 7,759 7,586 7,933 8,541 8,456 8,137 Oil 3,610 3,617 3,048 3,251 3,118 3,212 2,912 3,044 2,953 3,049 Acid 5,662 2,721 2,542 2,483 2,752 2,595 2,778 3,191 2,826 2,740 Alkali 2,777 2,648 1,867 2,563 1,889 1,778 2,243 2,306 2,677 2,348 % of total ------Oil 30.0% 40.3% 40.9% 39.2% 40.2% 42.3% 36.7% 35.6% 34.9% 37.5% -0.4% -1.1% Acid 156.8% 75.2% 83.4% 76.4% 88.3% 80.8% 95.4% 104.8% 95.7% 89.9% -0.1% -6.6% Alkali 49.0% 97.3% 73.5% 103.2% 68.7% 68.5% 80.7% 72.3% 94.7% 85.7% 4.4% -0.9% The market for industrial waste is highly regulated. The first law outlining specific waste types and stipulating appropriate disposal practices was promulgated in 1970, with additional recycling and waste related laws coming into effect in the early and
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mid-2000s. In 1998 a manifest system to track waste from its origin through final processing was established. The purpose of the manifest system seems to be increased scrutiny and accountability for waste generators (waste generators are required to submit completed manifests within 10 days after final disposal). The ramifications for waste generators are substantial: if an intermediate processor makes a mistake, disposes of the waste improperly, etc. the ultimate responsibility (liability) rests with the company that created the waste.
Companies competing in industrial waste processing must have specific licenses to process different types of industrial waste. The licensing process is lengthy and requirements are relatively strict (obtaining a license can take several years, limiting market growth and reducing mobility of entrants and exits). Although the company provides collection services, Daiseki’s business is predominantly involved with intermediate treatment. Data regarding the number of competing collection and intermediate waste processing firms is highlighted below:
Industrial waste disposal industry: number of permits Nu mb er o f p ermit s FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Industrial waste processing companies Collection, transportation, transshipment 246,669 256,796 271,222 281,158 274,899 197,524 193,459 188,475 185,427 185,037 Transshipments 8,183 8,543 8,528 8,590 8,571 8,648 8,601 8,567 8,461 8,540 Excluding transshipments 238,486 248,253 262,694 272,568 266,328 188,876 184,858 179,908 176,966 176,497 Disposal 12,934 13,368 13,737 13,985 13,902 13,538 13,477 13,400 13,221 13,242 Intermediate treatment 11,818 12,273 12,663 12,917 12,878 12,585 12,564 12,491 12,350 12,378 Final disposal 540 426 428 417 401 352 332 346 319 294 Intermediate treatment and final disposal 576 669 646 651 623 601 581 563 552 570 Sum 259,603 27,164 284,959 295,143 288,801 211,062 206,936 201,875 198,648 198,279 Special cont rol indust rial w ast e Collection, transportation, transshipment 26,654 28,862 30,064 31,184 30,921 22,004 21,490 19,782 19,260 19,051 Transshipments 1,156 1,079 1,144 1,166 1,148 1,197 1,201 1,210 1,184 1,211 Excluding transshipments 25,498 27,783 28,920 30,018 29,773 20,807 20,289 18,572 18,076 17,840 Disposal 844 867 882 893 893 864 863 842 766 806 Intermediate treatment 775 797 814 815 815 784 780 766 720 728 Final disposal 47 44 45 53 54 52 56 51 53 56 Intermediate treatment and final disposal22262325242827252322 Sum 27,498 29,729 30,946 32,077 31,814 22,868 22,353 20,624 20,056 19,857 Total 287,101 56,893 315,905 327,220 320,615 233,930 229,289 222,499 218,704 218,136 Source: Shared Research, based on data from Ministry of the Environment
The total number of intermediate treatment facilities has been increasing since 1992; however, the number of facilities using dehydration (used by Daiseki for sludge and wastewater processing) technologies has declined approximately 47% during FY98-FY09. The company suggests that as manufacturers have been creating more complex and technologically advanced products, industrial waste has also become more complicated, increasing processing difficulty. Given increased regulatory pressure on treatment companies and more complex waste types, the contraction of dehydration treatment companies could be interpreted as a “survival of the fittest”.
The increase in the number of processing facilities under "other" stems largely from increases in (1) facilities used to reduce the size of scrap wood and various kinds of rubble, and (2) facilities for shredding waste plastic. Shared Research believes that the increase in capacity in these two particular areas represents the first steps by general industrial waste processors, construction waste processors, and waste collection companies toward entering the intermediate waste processing market.
Number of intermediate treatment facilities
20,000 Incineration Dehydration Other
15,000 7,752 10,005 9,278 8,597 5,776 10,452 11,631 10,954 11,677 11,969 12,102 12,196 12,334 12,399 12,537 12,737 10,000 6,653 6,631 6,724 6,715 6,708 6,646 6,440 6,690 6,666 6,416 6,250 6,193 4,810 5,985 4,221 6,109 3,935 3,774
5,000 3,532 3,383 3,208 3,125 3,063 2,994 2,933 6,482 5,870 5,549 5,296 5,080 4,125 4,041 3,948 3,942 3,902 3,901 3,894 3,878 3,833 3,819 3,662 3,590 3,476 3,376 3,370 3,229 3,182 3,131 3,056 0 2,901 Apr 1992 Apr 1996 Apr 2000 Apr 2004 Apr 2008 Apr 2012 Apr 2016 Source: Shared Research based on the Ministry of the Environment
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Intermediate processing facilities for industrial waste: breakdown by type of waste Total Incineration Dehydration Other (facilit ies) Waste Waste Scrap wood and Waste plastic Sludge Other Other oil plastic rubble facilit ies facilit ies
Apr-01 17,787 5,296 709 646 1,708 2,233 6,715 5,776 4,091 617 1,068 Apr-02 19,540 5,080 717 646 1,572 2,145 6,708 7,752 5,970 703 1,079 Apr-03 19,284 4,041 644 629 1,125 1,643 6,646 8,597 6,684 832 1,081 Apr-04 19,916 3,948 650 637 1,066 1,595 6,690 9,278 7,248 958 1,072 Apr-05 20,613 3,942 654 635 1,076 1,577 6,666 10,005 7,765 1,161 1,079 Apr-06 19,164 3,902 679 639 1,052 1,532 4,810 10,452 8,135 1,286 1,031 Apr-07 19,076 3,901 691 668 1,009 1,533 4,221 10,954 8,529 1,411 1,014 Apr-08 19,444 3,878 696 691 980 1,511 3,935 11,631 9,061 1,575 995 Apr-09 19,345 3,894 683 699 983 1,529 3,774 11,677 9,056 1,649 972 Apr-10 19,320 3,819 680 680 956 1,503 3,532 11,969 9,283 1,738 948 Apr-11 19,147 3,662 666 675 899 1,422 3,383 12,102 9,365 1,777 960 Apr-12 18,880 3,476 631 694 820 1,331 3,208 12,196 9,457 1,792 947 Apr-13 18,829 3,370 621 687 792 1,270 3,125 12,334 9,594 1,813 927 Apr-14 18,691 3,229 623 664 755 1,187 3,063 12,399 9,615 1,869 915 Apr-15 18,532 3,394 601 670 702 1,422 2,934 12,204 9,730 1,887 588 Apr-16 18,390 3,239 587 666 656 1,331 2,830 12,321 9,818 1,917 586 Source: Shared Research based on data from the Ministry of the Environment
Industrial waste processing volume: Rubble and waste plastic (FY2015) Construction Manufacturing Waste ('000 t) Total (%) (%) industry industry Scrap wood 7,248 5,501 76% 1,155 16% Rubble 64,212 60,364 94% 2,626 4% Waste plastic 6,823 1,375 20% 3,239 47% Source: Shared Research based on the Ministry of the Environment
The main forces shaping the market are the number of manufacturers (level of output) and legal constraints (specific treatments for certain wastes, etc.). The company expects regulatory standards to continue tightening in terms of processing requirements and increased pressure on manufacturers to achieve “zero emission” targets (emphasizing recycling and minimized resource consumption). With respect to the quantity of waste generated by factories, the company expects the number of factories to continue a declining trend which began in the mid-1990s as production moved offshore to minimize costs.
Market growth
In terms of the core business (industrial waste recycling), important variables for Daiseki are the total quantity of industrial waste and legal requirements for waste treatment. It seems unlikely that Japanese companies will reverse the off-shoring trend and return to using factories located in Japan, therefore a sideways volume outlook for the market could be considered optimistic. Therefore, growth for recyclers is more likely to occur from regulatory changes (higher degrees of quality for final output, more stringent recyclable components, etc.) that could increase the need for recycling expertise.
In this context, Daiseki’s growth opportunities are mostly limited to taking share from other companies (including substitute solutions), something that stricter regulations and growing social and corporate environmental awareness probably make easier.
For Daiseki Eco Solution, the company estimates the total market potential to be about 100 billion yen. The market for soil survey and treatment services is driven substantially by the housing and construction industries, and given the declining demographic trends, a long-run increase in market size seems unlikely. Regulatory changes could add uncertainty. Short-term opportunities could develop for soil processing companies as licensing requirements change (changes in April 2010 are expected to weaker, smaller companies are expected to exit the market as the burden on companies providing the services increases).
Customers
Producers of industrial waste are the customer of Daiseki parent. As the processing price changes depending on content of waste, prices are determined individually with each customer. When costs of outsourced final disposal (landfill) increase, it impacts the processing prices set by the company. Collection, treatment, and disposal of industrial waste are governed by Japanese Law. The
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company’s largest customers account for approximately 2–3% of total sales, meaning that no single client is big enough to cause significant fluctuations in the company’s sales.
Daiseki MCR buys recycled batteries. The recycled components are commodities (lead, plastic, etc.) which prices are determined on the open market.
Suppliers
Daiseki does not have any critical suppliers for its main waste recycling business. The company’s technology and experience are the key processes ingredients. Core suppliers for the lead recycling business are battery brokers and automobile dealerships. The company commented that success in the battery recycling business hinges on keeping utilization levels high to minimize costs; emphasizing the importance of effective sourcing. The balance of power between suppliers and recyclers of batteries seems roughly equal: battery brokers seek the best prices and biggest buyers, whereas recyclers seek to boost utilization through larger quantities.
Barriers to entry
High. The main limiting factors are licenses, land, and equipment. Obtaining licenses can take 2-3 years or longer for specific treatment types (incineration licenses are more complicated, for example) and types of services offered (collection and transport, different types of industrial waste etc. all require separate licenses). Land and equipment require capital outlays, which can be significant.
An intangible barrier to entry could include building credibility with waste producers to win business. Incumbents have the advantage of track record and experience; new entrants would need a compelling reason for manufacturers to take on the risk of new waste processors - producers are legally liable for their waste from generation through final processing.
Competition
Transportation costs can have significant influences on waste disposal costs so the competitive landscape is determined more by geography than capabilities. The company claims that it has no peers in terms of similar capacities and treatment methods (recycling). The largest waste disposal competitor is Dowa Holdings (TSE 5714), which offers waste recycling (focusing on solid waste such as electronics, metal scrap, vehicles, etc.), waste treatment (using incineration), and operates final disposal facilities (landfills). Other competitors that offer recycling include Kureha Corporation (TSE 4023), Nihon Chemtech (Unlisted), and Towa Oil (Unlisted).
Competing firms for Daiseki MCR include Toho Zinc (TSE 5707), Mitsubishi Materials (TSE 5711), and Mitsui Mining and Smelting (TSE 5706). In addition to listed competitors, the company commented that there are numerous smaller companies that provide similar services; there were over 10,000 companies licensed to perform intermediate treatment of industrial waste as of 2015 (see Market overview).
Daiseki Eco. Solution’s most notable competitor is Dowa Holdings (TSE 5714). Dowa has two soil remediation facilities, and offers both on-site and off-site treatment.
Substitutes
Substitutes for waste recycling include a reduction of total waste output (increased material and production engineering to reduce waste), waste minimization before final disposal (through shrinking, crushing, burning, etc.), and illegally dumping waste. R&D specifically for waste reduction seems unlikely unless recycling costs become otherwise prohibitive. Recycling waste can be cheaper than other treatment methods and provide an element of PR for manufacturers (as eco-friendly companies), so the relative attractiveness of recycling vs. alternative seems to be in favor of recycling. Illegal dumping (which is more typical for solid waste), although technically a substitute for waste treatment, is probably irrelevant for blue chip clients of Daiseki.
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Strategy
The company’s strategy has been to increase its range of services and geographies where it competes. The company has historically competed in Chubu area (which generated 16.6% of total industrial waste in Japan in FY2010); however nearly twice as much waste is generated in Kanto (25.6% of total industrial waste in FY2010, according to the Ministry of the Environment). Daiseki has suggested it intends to increase utilization of its Kanto facility. Based on its market size and share, the company considers the Kanto (centered on Tokyo) and Kansai (centered on Osaka) regions, followed by Kyushu, to have the most potential growth potential, while they expect Nagoya and Hokuriku to have relatively weak growth.
The factors controlling growth are salespeople and industrial production cycles (essentially, time). The company doesn’t expect any sudden explosive growth, suggesting that low double-digit (steady between 10% and 15%) rates are more reasonable. Daiseki’s business developed as a liquid waste treatment specialist, but has used M&A to expand into other areas (e.g. Daiseki MCR, then Tamura Sangyo, acquisition in 2007 for battery recycling and its 2010 acquisition of System Kikou for is large fuel storage tank cleaning business). The company indicated that other possible options would be other materials such as plastics and industrial (non-precious) metals.
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Historical performance and financial statements Income statement
Income statement FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales 31,477 36,513 36,013 42,100 45,738 50,809 44,232 49,185 51,313 YoY 8.2% 16.0% -1.4% 16.9% 8.6% 11.1% -12.9% 11.2% 4.3% Cost of sales 21,790 26,010 25,737 29,801 32,830 37,721 31,865 34,700 36,124 Gross profit 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,189 GPM 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 29.6% SG&A expenses 4,296 4,752 4,870 4,999 5,605 5,238 5,247 5,707 6,082 SG&A ratio 13.6% 13.0% 13.5% 11.9% 12.3% 10.3% 11.9% 11.6% 11.9% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,107 YoY 10.8% 6.7% -6.0% 35.0% 0.1% 7.5% -9.3% 23.3% 3.8% OPM 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 17.7% Non-operating income (expenses) 197 151 150 102 134 106 108 137 92 Recurring profit 5,587 5,901 5,554 7,400 7,436 7,955 7,228 8,914 9,199 YoY 12.1% 5.6% -5.9% 33.2% 0.5% 7.0% -9.1% 23.3% 3.2% RPM 17.7% 16.2% 15.4% 17.6% 16.3% 15.7% 16.3% 18.1% 17.9% Extraordinary gains (losses) -80 -14 22 -187 45 -58 52 33 187 Pre-tax profit 5,506 5,888 5,576 7,213 7,481 7,897 7,281 8,948 9,387 Income taxes 2,368 2,614 2,434 2,889 3,060 3,238 2,584 2,592 2,921 Implied tax rate -43.0% -44.4% -43.7% -40.1% -40.9% -41.0% -35.5% -29.0% -31.1% Minority interests 22 79 116 381 385 721 489 521 355 Net income 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,110 YoY 22.3% 2.6% -5.3% 30.4% 2.4% -4.7% 7.4% 41.2% 4.7% Net margin 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% 11.9% Source: Shared Research based on company data Financial results of the parent and subsidiaries FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 FY02/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Est. Daiseki Co. Sales 21,856 24,011 23,808 25,074 26,459 26,016 25,746 28,778 32,127 33,170 (parent) YoY 13.8% 9.9% -0.8% 5.3% 5.5% -1.7% -1.0% 11.8% 11.6% 3.2% Operating profit 5,197 5,475 5,263 5,866 6,434 6,035 6,137 7,170 8,294 8,870 YoY 37.4% 5.3% -3.9% 11.5% 9.7% -6.2% 1.7% 16.8% 15.7% 6.9% OPM 23.8% 22.8% 22.1% 23.4% 24.3% 23.2% 23.8% 24.9% 25.8% 26.7% Daiseki Sales 5,230 7,227 7,509 10,586 12,843 19,086 14,373 14,926 14,193 14,712 Eco. YoY -25.2% 38.2% 3.9% 41.0% 21.3% 48.6% -24.7% 3.9% -4.9% 3.7% Solution Operating profit 128 408 592 1,298 1,226 2,517 1,508 1,339 898 900 YoY -81.6% 219.6% 45.0% 119.4% -5.5% 105.3% -40.1% -11.2% -33.0% 0.2% OPM 2.4% 5.6% 7.9% 12.3% 9.5% 13.2% 10.5% 9.0% 6.3% 6.1% Daiseki Sales 3,234 3,097 2,791 3,113 3,133 2,951 2,150 2,846 2,848 2,910 MCR YoY 7.7% -4.2% -9.9% 11.5% 0.6% -5.8% -27.1% 32.4% 0.1% 2.2% Operating profit 308 -65 22 242 -281 -725 -431 64 -205 199 YoY -45.0% --1,019.9%------OPM 9.5% -2.1% 0.8% 7.8% -9.0% -24.6% -20.0% 2.2% -7.2% 6.8% System Sales 961 2,539 2,244 2,963 3,145 2,800 2,061 2,627 2,229 2,600 Kikou YoY - 164.2% -11.6% 32.0% 6.1% -11.0% -26.4% 27.5% -15.2% 16.6% Operating profit -17 122 -95 121 139 188 -66 218 114 202 YoY - - - - 14.9% 35.3% - - -47.7% 77.2% OPM -1.8% 4.8% -4.2% 4.1% 4.4% 6.7% -3.2% 8.3% 5.1% 7.8% Source: Shared Research based on company data
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Financial ratios Profitability and ratios FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Gross profit 9,686 10,502 10,275 12,298 12,908 13,088 12,367 14,484 15,189 GPM 30.8% 28.8% 28.5% 29.2% 28.2% 25.8% 28.0% 29.4% 29.6% Operating profit 5,390 5,750 5,404 7,298 7,302 7,849 7,120 8,777 9,107 OPM 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 17.7% EBITDA 7,229 7,478 7,219 9,066 8,929 10,599 9,535 11,272 11,458 EBITDA margin 23.0% 20.5% 20.0% 21.5% 19.5% 20.9% 21.6% 22.9% 22.3% Financial ratios ROA (RP-based) 10.7% 10.6% 9.5% 11.9% 11.0% 11.3% 10.1% 11.9% 11.3% ROE 7.3% 7.1% 6.4% 7.9% 7.6% 7.0% 7.4% 9.9% 9.7% Total asset turnover 60.1% 65.5% 61.8% 67.9% 67.6% 72.1% 62.0% 65.8% 63.1% Inventory turnover 17.5 17.8 18.7 19.8 17.9 21.7 13.6 11.5 14.8 Days in inventory 20.9 20.5 19.5 18.4 20.4 16.8 26.9 31.7 24.7 Working capital (JPYmn) 4,909 5,373 5,151 6,417 7,289 7,157 7,294 7,552 6,294 Current ratio 377.8% 387.4% 383.3% 430.6% 367.7% 439.4% 425.2% 452.1% 345.8% Quick ratio 348.1% 362.0% 364.0% 404.6% 345.6% 416.8% 385.5% 414.0% 326.8% OCF / Current liabilities 91.7% 69.2% 68.4% 78.6% 56.5% 76.5% 63.3% 110.2% 91.2% OCF / Total liabilities 66.3% 57.4% 58.4% 64.6% 43.5% 67.9% 53.4% 94.0% 65.8% Cash conversion cycle (days) 50.6 47.1 48.2 44.9 49.3 47.1 55.3 53.1 45.9 Change in working capital 320 464 -222 1,266 872 -132 137 258 -1,258 Source: Shared Research based on company data
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ROE, ROA, ROIC
FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROE 7.3%7.1%6.4%7.9%7.6%7.0%7.4%9.9%9.7% Net margin 9.9% 8.7% 8.4% 9.4% 8.8% 7.6% 9.3% 11.9% 11.9% Total asset turnover 0.60 0.65 0.62 0.68 0.68 0.72 0.62 0.66 0.63 Financial leverage (equity multiplier) 1.22 1.24 1.23 1.24 1.27 1.29 1.29 1.27 1.29 ROA (RP-based) 10.7% 10.6% 9.5% 11.9% 11.0% 11.3% 10.1% 11.9% 11.3% ROIC 7.1% 7.3% 6.6% 8.9% 8.4% 8.7% 7.9% 9.7% 9.6% NOPAT 3,197 3,410 3,205 4,524 4,527 5,052 4,766 6,068 6,297 Interest-bearing debt＋Net assets 44,995 46,500 48,603 50,886 54,107 58,057 60,633 62,590 65,807 ROIC (before tax) 12.0% 12.4% 11.1% 14.3% 13.5% 13.5% 11.7% 14.0% 13.8% OPM 17.1% 15.7% 15.0% 17.3% 16.0% 15.4% 16.1% 17.8% 17.7% Sales / Invested capital 0.70 0.79 0.74 0.83 0.85 0.88 0.73 0.79 0.78 ROE, ROA, ROIC
15% ROE ROA (RP-based) ROIC
9.7% 9.6% 10% 8.9% 8.4% 8.7% 7.9% 9.9% 9.7% 7.1% 7.3% 6.6% 7.9% 7.6% 7.4% 7.3% 7.1% 7.0% 5% 6.4%
0% FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 ROE
25% ROE Net margin Total asset turnover (right axis) Financial leverage (right axis) 1.5
1.3 1.3 1.3 1.3 1.3 20% 1.2 1.2 1.2 1.2 1.3
15% 1.1 11.9% 11.9% 9.9% 9.4% 9.3% 8.7% 8.4% 8.8% 10% 7.6% 0.9 9.9% 9.7% 7.9% 7.3% 7.1% 7.6% 7.0% 7.4% 5% 6.4% 0.7
0% 0.5 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 ROIC 20% ROIC (before tax) OPM Sales / Invested capital (right axis) 1.1 17.8% 17.7% 17.1% 17.3% 15.7% 16.0% 16.1% 15.0% 15.4% 15% 0.9
0.9 0.8 10% 0.8 0.8 0.8 0.8 0.7 0.7 0.7 5% 0.7
0% 0.5 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19
(JPYbn) Net assets Interest-bearing debt Operating profit (right axis) (JPYbn) 100 9.1 10 8.8 7.8 80 7.3 7.3 7.1 8
0.9 5.8 2.5 60 5.4 5.4 1.5 1.9 6 0.9 1.0 1.4 1.4 1.5 40 4 61.5 66.6 55.1 58.6 59.3 48.5 50.8 20 44.0 46.2 2
0 0 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data
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Balance sheet
Balance sheet FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and cash equivalents 17,917 19,723 20,174 24,416 26,763 28,830 27,256 28,183 31,535 Accounts receivable 5,966 6,452 6,616 7,887 9,256 9,048 8,098 8,020 8,055 Allowance for doubtful accounts -20 -17 -13 -55 -30 -35 -9 -6 -4 Inventories 1,346 1,571 1,186 1,826 1,844 1,630 3,073 2,952 1,937 Deferred tax assets 263 271 265 423 245 284 224 293 266 Other current assets 717 277 248 275 475 436 597 405 388 Total current assets 26,191 28,277 28,477 34,773 38,554 40,194 39,240 39,849 42,179 Buildings and structures 4,412 4,152 3,976 3,877 4,520 5,413 4,981 6,402 8,315 Machinery, equipment and vehicles 1,804 1,754 1,567 1,611 2,332 4,196 3,618 3,709 3,575 Land 10,047 10,254 11,704 12,181 12,907 12,904 13,442 16,083 16,658 Other fixed assets 357 959 2,180 2,461 3,242 353 2,130 1,257 2,956 Fixed assets 16,620 17,119 19,427 20,130 23,001 22,866 24,171 27,451 31,504 Goodw ill 2,241 1,970 1,699 1,428 1,157 725 649 572 496 Other 285 276 268 262 265 295 289 277 290 Total intangible assets 2,527 2,247 1,967 1,690 1,422 1,021 938 850 786 Investment securities 5,811 6,283 6,439 4,786 4,498 4,673 6,453 6,350 8,349 Long-term time deposit 1,500 1,500 1,500 1,500 1,500 - - 1,000 1,000 Deferred tax assets 674 647 615 694 648 623 541 584 700 Allowance for doubtful accounts -7 -28 -13 -43 -45 -42 -73 -73 -65 Other 1,116 1,060 1,055 1,040 1,097 1,012 1,130 1,191 1,070 Investments and other assets 9,094 9,463 9,595 7,977 7,699 6,267 8,052 9,053 11,054 Total fixed assets 28,243 28,831 30,991 29,798 32,122 30,155 33,163 37,354 43,345 Total assets 54,435 57,108 59,468 64,571 70,677 70,350 72,403 77,203 85,524
LIABILITIES Accounts payable 2,403 2,650 2,651 3,296 3,811 3,521 3,877 3,420 3,698 Short-term debt 1,120 845 1,372 860 1,500 1,139 2,099 449 1,695 Income taxes payable 1,521 1,447 1,183 1,946 1,529 2,038 1,121 1,664 1,704 Allowance for bonus payable 221 259 261 277 284 307 304 315 355 Other 1,667 2,099 1,960 1,695 3,359 2,140 1,823 2,964 4,741 Total current liabilities 6,932 7,300 7,429 8,075 10,485 9,147 9,228 8,814 12,197 Long-term debt 353 182 10 - - 725 425 500 962 Provision for retirement benefits 718 776 827 870 1,010 765 812 876 941 Provision for directors' retirement benefits 244 265 277 292 309 305 318 243 259 Other 7 56 88 196 253 123 110 135 205 Tot al fixed liabilit ies 1,324 1,279 1,203 1,360 1,573 1,919 1,666 1,755 2,369 Tot al liabilit ies 8,257 8,580 8,632 9,435 12,058 11,067 10,895 10,570 14,567 Net assets ------Capital stock 6,382 6,382 6,382 6,382 6,382 6,382 6,382 6,382 6,382 Capital surplus 7,051 7,051 7,051 7,051 7,051 7,051 7,051 7,068 7,097 Retained earnings 30,532 32,803 34,926 37,955 40,955 43,873 46,705 47,684 51,848 Treasury stock -126 -127 -128 -132 -135 -2,804 -4,022 -429 -404 Valuation and translation adjustments 170 167 231 283 413 143 280 276 114 Minority interests 2,168 2,251 2,373 3,596 3,951 4,636 5,111 5,651 5,919 Total net assets 46,177 48,528 50,835 55,136 58,618 59,283 61,508 66,633 70,957 Working capital 4,909 5,373 5,151 6,417 7,289 7,157 7,294 7,552 6,294 T ot al int erest -bearing debt 1,473 1,027 1,382 860 1,500 1,864 2,524 949 2,657 Net cash 17,944 20,196 20,292 25,056 26,763 26,966 24,732 28,234 29,878 Per share data (JPY) FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Shares issued (year-end; '000) 45,124 45,124 45,125 45,125 45,125 45,125 45,125 43,000 43,000 EPS 69.2 70.9 67.2 87.5 89.6 85.8 95.8 136.5 142.9 Dividend per share 20.0 20.0 21.0 22.0 24.0 28.0 29.0 40.0 46.0 Book value per share 977 1,027 1,076 1,144 1,214 1,261 1,319 1,427 1,521 Source: Shared Research based on company data
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Cash flow statement
Cash flow statement FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 5,476 4,922 5,041 6,093 5,241 7,509 5,813 9,938 9,580 Cash flows from investing activities (2) -3,324 -1,709 -6,019 933 -2,493 -2,829 -4,452 -6,237 -8,396 Free cash flow (1+2) 2,152 3,213 -978 7,026 2,748 4,680 1,361 3,701 1,184 Cash flows from financing activities -1,258 -1,396 -577 -841 -484 -3,702 -1,934 -2,957 -347 Depreciation and amortization (A) 1,839 1,728 1,815 1,768 1,627 2,750 2,415 2,495 2,351 Capit al expendit ures (B) -1,701 -1,979 -3,917 -2,367 -4,239 -2,092 -3,662 -5,748 -6,408 Working capital changes (C) 320 464 -222 1,266 872 -132 137 258 -1,258 Simple FCF (NI + A + B - C) 2,932 2,479 1,144 2,077 551 4,637 2,748 2,322 3,311 Source: Shared Research based on company data
Major capital expenditure items:
▷ FY02/01: Kansai facility (land, JPY918mn), Nagoya (expansion, JPY564mn) ▷ FY02/02: Kyushu (land, JPY656mn), Nagoya (water treatment facility, JPY539mn), Hokuriku (sludge drying facility, JPY498mn) ▷ FY02/03: Kansai (new establishment, JPY1.3bn), Hokuriku (water treatment facility, JPY230mn), Kyushu (sludge processing, JPY218mn) ▷ FY02/04: Nagoya (Daiseki Eco. Solution Nagoya recycling center—land, JPY395mn) ▷ FY02/05: Kyushu (water treatment facility, JPY730mn), Nagoya (sludge processing, JPY678mn), vehicles and equipment (JPY233mn). Daiseki Eco. Solution—Nagoya recycling center (JPY182mn), Yokohama land and factory (JPY803mn) ▷ FY02/06: Kanto (land, JPY1.4bn; construction JPY1.2bn), vehicles and equipment (JPY282mn) ▷ FY02/07: Kanto (plant, JPY970mn), Osaka (Daiseki Eco. Solution Osaka recycling center—land JPY1.3bn) ▷ FY02/08: Nagoya (fuel recycling facility, JPY327mn), Kansai (water treatment JPY500mn), Kanto (construction JPY212mn), vehicles and equipment (JPY270mn) ▷ FY02/09: Nagoya (fuel and other recycling, JPY337mn; Kanto (fuel recycling, JPY314mn), vehicles and equipment (JPY298mn). Daiseki Eco. Solution—land and soil treatment JPY557mn) ▷ FY02/10: Vehicles and equipment (JPY103mn), Daiseki MCR (land, JPY401mn) ▷ FY02/01: Kansai facility (land, JPY801mn), vehicles and equipment (JPY124mn) ▷ FY02/12: Vehicles (JPY314mn), Daiseki MCR (land JPY823mn) ▷ FY02/13: Nagoya facility (land, JPY901mn), Vehicles (JPY416mn), Daiseki Eco. Solution’s Green Arrows Kyushu unit (JPY660mn) ▷ FY02/14: Vehicles (JPY309mn), Daiseki Eco. Solution (JPY775mn), new main factory for Daiseki MCR (JPY769mn) ▷ FY02/15: Nagoya Recycling Plant (JPY1.4bn), vehicles (JPY165mn), Daiseki Eco. Solution and GAC Second Factory (JPY555mn), land for a PCB site (JPY704mn). ▷ FY02/16: Kansai facility (fuel recycling facility, JPY316mn), vehicles (JPY388mn), DES (JPY735mn: PCB transshipment/storage facility, JPY110mn; addition of GAK production line, JPY153mn) ▷ FY02/17: Vehicles (JPY393mn), DES (JPY2.7bn: construction of Yatomi Recycling Center, JPY1.8bn; renewal of soil cleaning facility of Nagoya Recycling Center, JPY110mn) ▷ FY02/18: Vehicles (JPY325mn, 20 transport vehicles (JPY300mn)), DES (JPY4.5bn) ▷ FY02/19: Vehicles (JPY384mn, 17 transport vehicles (JPY360mn), DES (JPY4.9bn, including JPY2.4bn for Yokohama-Ebisu Recycling Center, JPY1.7bn for Gifu Recycling Center), and JPY714mn for new head office building and related land)
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Historical performance
Q1 FY02/20 results (out July 1, 2019) Results overview
▷ Q1 FY02/20 results: In Q1 FY02/20 (March–May), sales were JPY13.6bn (+9.3% YoY), operating profit was JPY2.8bn (+18.1% YoY) and net income was JPY1.8bn (+14.4% YoY), a record high. Progress against the full year plan for operating profit (JPY10.1bn, +10.9% YoY) was 27.4%, above 25.7% in Q1 FY02/19. The change in depreciation policy (from declining balance to straight line depreciation) boosted operating profit by JPY108mn. ▷ Daiseki parent company: Sales increased 9.4% YoY with the company gaining share in the market in the industrial waste treatment and recycling business. Operating profit increased 8.4% YoY to JPY2.3bn. Progress of operating profit against the full-year forecast was 26.0%. However, the parent company’s gross profit margin fell 0.8pp YoY to 38.1% from 38.9%, which is a point that requires attention. ▷ Daiseki Eco. Solution Co., Ltd. (TSE1: 1712): Operating profit increased 18.7% YoY to JPY324mn. The change in depreciation policy added JPY54mn to operating profit. Excluding this impact, operating profit was flat YoY. The soil contamination research and cleanup business showed an improvement due to increased orders for highly specialized projects, cost savings, and the impact of opening the Yokohama Ebisu Recycling Center (started operations in January 2019). Progress against the full-year operating profit forecast was 36.0%. ▷ Daiseki MCR: Daiseki MCR’s main business is lead recycling, focusing in particular on lead batteries. Sales decreased 2.0% YoY to JPY726mn, while operating profit recovered strongly, almost quadrupling compared to the previous year. Although sales were sluggish because of the weak lead market, lower procurement costs for recycling batteries contributed to the improvement in
profitability. ▷ System Kikou: The large oil tank cleaning business continues to operate at close to 100% capacity. Q1 operating profit showed a significant improvement to JPY106mn compared with an operating loss of JPY64mn in Q1 FY02/19. ▷ Company forecasts for FY02/20 remain unchanged: For FY02/20, the company is forecasting full-year consolidated sales of JPY53.5bn (+4.3% YoY), an operating profit of JPY10.1bn (+10.9% YoY), and net income attributable to owners of the parent of JPY6.7bn (+9.7% YoY). If realized, this would be the third straight year that operating profit has set a new record high and the
first year operating profit has topped JPY10.0bn.
In Q1 FY02/20 (March–May), sales were JPY13.6bn (+9.3% YoY), operating profit was JPY2.8bn (+18.1% YoY) and net income was JPY1.8bn (+14.4% YoY), a record high. Progress against the full year plan for operating profit (JPY10.1bn, +10.9% YoY) was 27.4%, above 25.7% in Q1 FY02/19, indicating strong results. However, the parent company’s gross profit margin fell 0.8pp YoY to 38.1% from 38.9%, which is a point that requires attention. Sales are increasing overall, but a drop in production in semiconductor-related industries appears to be having a negative effect on the sales mix. If this impact grows, parent company results may worsen more than projected by company forecasts. On the other hand, the company’s subsidiaries, including Daiseki Eco. Solution and System Kikou, are outpacing expectations, which gives the impression that the company has the potential to meet its consolidated forecasts.
Daiseki Co. (parent) In Q1, Daiseki Co. (parent) sales were JPY8.7bn (+9.4% YoY), gross profit was JPY3.3bn (+7.3% YoY), and operating profit was JPY2.3bn (+8.4% YoY). Industrial production showed negative growth YoY during the same period, but was widely outpaced by growth in parent company sales. The effect of price increases reflecting customer numbers (client accounts) that continued to rise (share expansion) until FY02/19 and heightening trucking rates appear to be linked to growth in sales. By customer industry, sales grew in construction, pharmaceuticals, chemicals, rubber, ceramics and other industries but were sluggish in nonferrous metal products.
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Gross profit margin fell 0.8pp YoY to 38.1% from 38.9%. Despite growth in sales, the company accepted less waste from the nonferrous metal products industry, which is relatively more profitable liquid waste that contains a low percentage of residue requiring final disposal. This change had a negative effect on sales mix, which the company says led to the drop in gross profit margin. A reduction in semiconductor-related production led to a decline in production of nonferrous metal products delivered within the semiconductor industry. As a result of this decline, the company appears to have accepted less waste from the nonferrous metal products industry.
If semiconductor-related production continues to stagnate, it will also continue to have a negative impact on the company’s gross profit margin. Parent company sales were up 3.2% YoY to JPY33.2bn, gross profit was up 6.3% YoY to JPY12.9bn, and gross profit margin finished up 1.1pp YoY at 39.0%. Sales figures are progressing higher than forecast and may exceed full-year targets. However, the same prediction cannot be made for gross profit without careful observation of future progress.
Daiseki Eco. Solution (DES) In Q1, Daiseki Eco. Solution’s sales were JPY3.5bn (+5.8% YoY). The volume of soil treated for contamination fell 3.2% YoY to 210,425 tons. However, enhanced sales of more complex treatments, which enable the company to distinguish itself from the competition, drove up treatment prices, and the company accepted a higher volume of plasterboard.
Operating profit was JPY324mn (+18.7% YoY). In addition to improved profits from the treatment of contaminated soil and increased acceptance of plasterboard, stable operations at the Yokohama-Ebisu Recycling Center (started on January 1, 2019), higher operation rates at the Yatomi Recycling Center, cost reduction, and a change in depreciation policy (boost of JPY54mn) all contributed to recovery in operating profit.
Q1 sales achieved just 24.0% of projections in the company’s full-year forecast (JPY14.7bn; -3.7% YoY), but operating profit finished high, achieving 36.0% of full-year projections (JPY900mn; +0.2% YoY). Shared Research believes that profit at Daiseki Eco. Solution is becoming increasingly likely to exceed company forecasts.
Daiseki MCR In Q1, Daiseki MCR recorded JPY726mn in sales (-2.0% YoY) and JPY28mn in operating profit (4.7x increase YoY). The company’s sales prices for recycled lead fell 10% YoY due in part to a decrease in LME lead prices, but the procurement costs of lead batteries for recycling decreased at a higher pace, leading to improved profit. In FY02/19, exports of lead batteries for recycling to South Korea, where acceptance prices are high, increased along with acceptance prices in Japan. However, the Basel Convention Act has effectively prohibited these exports to South Korea, and acceptance prices for lead batteries for recycling in Japan have fallen. In response to dropping procurement costs, Daiseki MCR is increasing its procurement of lead batteries for recycling and raising the operation rates of its recycling facilities.
The company recorded operating profit in Q1, after recording operating losses in each quarter since Q2 FY02/19. As a result of falling material prices (lead batteries for recycling), Daiseki MCR recorded inventory devaluation of JPY46mn in Q1. Daiseki MCR’s actual results appear to be improving more than the figures on the surface suggest. If current circumstances, including lead prices, continue as they have, FY02/20 operating profit has a high chance of exceeding full-year company forecasts (JPY199mn). Furthermore, acceptance prices of lead batteries for recycling have fallen to the same levels at which they were before they rose, and the company indicates that they are unlikely to fall any further.
System Kikou In Q1, System Kikou recorded JPY689mn in sales (+69.7% YoY) and JPY106mn in operating profit (JPY64mn operating loss in Q1 FY02/19). The increase in sales was primarily driven by cleaning projects for large oil tanks. System Kikou appears to be raising its large tank share, and indicates that its balance of orders is also increasing. The company has been thorough in its cost management, causing its gross profit margin to recover to 26.0%. Q1 results appear to have outpaced company forecasts.
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The company forecasts sales of JPY2.6bn and operating profit of JPY202mn in FY02/20. Q1 sales achieved 26.5% of the full-year forecast while operating profit reached 52.5%.
Full-year FY02/19 results (out April 4, 2019) Results overview
▷ FY02/19 results: For the full year, Daiseki reported consolidated sales of JPY51.3bn (+4.3% YoY), an operating profit of JPY9.1bn (+3.8% YoY), and net income attributable to owners of the parent of JPY6.1bn (+4.7% YoY). This topped its initial forecast (sales JPY50.2bn, operating profit JPY9.1bn, and net income JPY6.0bn) and set a new record high for earnings. ▷ Gains at parent company drive overall results: Aided by increases in waste oil processing volumes, parent operating profit rose 15.7% YoY to JPY8.3bn. This offset lower earnings at subsidiaries, including Daiseki Eco. Solution (TSE1: 1712), which saw operating profit decline 33.0% YoY to JPY898mn, and Daiseki MCR, which reported an operating loss of JPY205mn versus profit of JPY64mn in FY02/18. ▷ FY02/20 forecast: For FY02/20, the company forecasts full-year consolidated sales of JPY53.5bn (+4.3% YoY), an operating profit of JPY10.1bn (+10.9% YoY), net income attributable to owners of the parent of JPY6.7bn (+9.7% YoY), and EPS of JPY156.68. If realized, this would be the first time Daiseki reports an annual operating profit of more than JPY10.0bn. The
company expects to pay an annual dividend of JPY46.0 per share, the same as in FY02/19. ▷ Profitability expected to improve at both parent and subsidiaries: In addition to higher earnings at the parent, which is expected to continue benefiting from increases in waste oil processing volumes and market share gains, the company is also
expecting higher earnings at subsidiaries. At Daiseki Eco. Solution (DES), earnings are expected to finish slightly higher as unit pricing for soil remediation work bottoms out. At Daiseki MCR, whose main business is lead battery recycling, the company sees operations moving back into the black with an operating profit of JPY199mn as the business environment
quickly improves following a sharp drop in exports of used batteries to Korea and pickup in domestic demand for battery recycling.
Consolidated results for FY02/19 and company forecast for FY02/20 Daiseki reported full-year consolidated sales of JPY51.3bn (+4.3% YoY), an operating profit of JPY9.1bn (+3.8% YoY), and net income attributable to owners of the parent of JPY6.1bn (+4.7% YoY). This represented a new record high for earnings and also came in slightly ahead of the company's initial forecast (sales JPY50.2bn, operating profit JPY9.1bn, and net income JPY6.0bn) as above-plan results at the parent offset below-plan results at DES, where falling unit prices for soil contamination cleanup work led to a downward revision to its full-year outlook (on September 14, 2018).
For Q4 FY02/19 (December 2018-February 2019), the company reported consolidated sales of JPY12.4bn (-3.6% YoY), an operating profit of JPY2.0bn (-9.7% YoY), and net income of JPY1.4bn (-4.2% YoY). The drop in consolidated sales and earnings in Q4 reflected the dropout of a one-time boost to sales and earnings at DES in Q4 FY02/18. At the parent, Q4 sales were up 9.4% YoY and operating profit was up 11.6% YoY.
For FY02/20, the company is forecasting consolidated sales of JPY53.5bn (+4.3% YoY), an operating profit of JPY10.1bn (+10.9% YoY), net income attributable to owners of the parent of JPY6.7bn (+9.7% YoY), and EPS of JPY156.68. In addition to higher earnings at the parent, which is expected to continue benefiting from increases in waste oil processing volumes and market share gains, the company is expecting earnings at DES to move up as unit pricing for soil contamination cleanup work bottoms out and also sees Daiseki MCR moving back into the black after logging operating losses in FY02/19. Plans call for total capital spending of JPY11.4bn in FY02/20 versus JPY6.4bn in FY02/19, the increase due largely to the planned purchase of some JPY8.0bn worth of land in the Kansai area by the parent company.
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In FY02/19, parent company sales rose 11.6% YoY to JPY32.1bn and operating profit rose 15.7% YoY to JPY8.3bn, a new record high. Amid stable industrial production and steady demand for waste oil processing, the parent company continued expanding its market share and also benefited from higher selling prices for recycled fuel. Although outsourcing costs (mainly landfill-related) were higher, this was offset by increases in processing volumes and higher selling prices for recycled fuel, allowing the parent company to push up its gross profit margin to 37.8% (versus 37.5% in FY02/18) and its operating profit margin to 25.8% (versus 24.9%).
For FY02/20, Daiseki is forecasting parent company sales of JPY33.2bn (+3.2% YoY) and an operating profit of JPY8.9bn (+6.9% YoY). The forecast for modest top-line growth reflect the company's concerns about a slowdown in the economy and the limitations of its own processing capacity and manpower. Taking into consideration the market share gains Daiseki has made in the past and the additions to its processing capacity, Shared Research believes the company's forecast is a bit on the conservative side.
Daiseki Eco. Solution (DES) For FY02/19, Daiseki Eco. Solution (DES) reported full-year sales of JPY14.2bn (-4.9% YoY) and an operating profit of JPY898mn (-33.0% YoY). The disappointing results were due in large part to low-ball pricing by competitors that pushed down unit pricing on orders for soil decontamination work, especially during the first half of the year. Earnings were also hurt by a decline in the number of high-margin brownfield projects (in which DES buys contaminated land, then decontaminates the soil and sells the property). After DES lowered its full-year forecast in September 2018, the pressure on unit pricing on soil contamination cleanup work subsided enough for DES to issue a modest upward revision to its full-year forecast in January 2019 and even finish the year slightly ahead of that upwardly revised forecast.
For FY02/20, DES is forecasting full-year sales of JPY14.7bn (+3.7% YoY) and an operating profit of JPY900mn (+0.2% YoY). The forecast assumes a letup in pressure on unit prices, better volumes and pricing on orders from its upstream sales efforts (undertaken in conjunction with the parent), higher operating rates and lower costs at its Yatomi Recycling Center, improvements in operating efficiency resulting from better coordination between its two recycling centers in the Tokyo metropolitan area, and a boost to earnings from a change in its depreciation accounting methodology (from declining balance to straight line).
Daiseki MCR For FY02/19, Daiseki MCR reported full-year sales of JPY2.8bn (+0.1% YoY) and an operating loss of JPY205mn (versus profit of JPY64mn in FY02/18) as its mainstay lead battery recycling and lead refining operations slipped into the red. While processing and sales volumes were up at its battery recycling business, margins were hit hard by the drop in lead prices during the period. The operating environment has taken a sharp turn for the better since the end of FY02/19, however, as amendments to the Basel Convention Act have now gone in effect, sharply reducing exports of used lead batteries to South Korea and thereby improving the domestic pricing environment for buyers like Daiseki MCR.
In FY02/20, Daiseki MCR sees sales rising 2.2% YoY to JPY2.9bn and operations moving back into the black with an operating profit of JPY199mn.
Q3 FY02/19 results (out January 7, 2019) Results overview In cumulative Q3 FY02/19, sales and profits increased YoY with sales finishing at JPY38.9bn (+7.1% YoY) and operating profit at JPY7.1bn (+8.4% YoY); recurring profit was JPY7.2bn (+8.3% YoY) and net income attributable to owners of the parent was JPY4.7bn (+7.8% YoY). All three profit items recorded a record high for the cumulative Q3 period. Results at the parent company were up YoY and above plan. At DES, profitability had weakened due to a drop in unit prices per order since the start of the fiscal year and the business environment remains difficult. However, efforts such as strengthening direct sales to clients and reducing costs began to bear fruit slowly, and the subsidiary is showing signs of improved profitability. The results at subsidiaries Daiseki
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MCR and System Kikou lagged, with operating profit down YoY and below plan. That said, since the parent accounts for the majority of sales and earnings, the company was able to offset most of the decline in earnings at its subsidiaries.
DES announced a downward revision to its sales and earnings forecasts on September 14, 2018, but announced an upward revision for full-year results on January 7, 2019. DES believed full-year profits will surpass the previous forecasts, since the drop in unit prices on orders (caused by heavy competition) in the soil contamination research and cleanup business has since stabilized and cost reduction efforts at its plants have made steady progress, improving the profitability as a result. Meanwhile, Daiseki has not revised its consolidated earnings forecasts for the full year.
Daiseki Co. (parent) Results The parent reported sales of JPY24.3bn (+12.4% YoY), operating profit of JPY6.5bn (+16.8% YoY), recurring profit of JPY6.7bn (+16.4% YoY), and net income attributable to owners of the parent of JPY4.7bn (+15.9% YoY). Sales and earnings came in higher YoY and versus plan. These results reflected an increase in gross profit stemming from successful measures to increase market share, and rising industrial production and an accompanying increase in both handling volumes and prices for recycled heavy oil. Operations in Hokuriku (except for Nagoya), Kanto, Kansai, Kyushu, and Chiba all logged record-high sales for cumulative Q3. In particular, the company made steady progress with initiatives aimed at expanding its share of orders from large customers. Measures aimed at increasing the company’s share or orders were apparently successful, as sales grew across the board and were not skewed toward any particular industry. Due to the time lag between trends in the industrial production of customers and the actual recording of sales, if industrial production maintains high levels through FY03/19, the company’s sales can be expected to remain similarly high through 1H FY02/20.
As the sluggish recovery of the industrial production index has continued, since FY02/17 the company has been working to implement a set of new operational measures designed to expand its market share. Thus, it has been working on increasing the order volume from its existing clients while at the same time winning new clients by strengthening its suite of sales support tools. Daiseki appears to be further pushing these efforts to expand its sales routes and market share and the number of new accounts and overall accounts has been steadily increasing. Since Q4 FY02/17, the industrial production index has been increasing YoY—combined with effects from winning clients, this resulted in earnings growth from Q1 FY02/18.
There appears to have been no particular change to the company's cost structure. The GPM fell 0.6pp YoY in Q1, but this was because the Nagoya facility had a large, highly profitable project in FY02/18. Excluding this factor, the GPM remains favorable. In Q2, the GPM rose 0.6pp, aided by solid top-line growth and rising fuel prices. Recycled fuel sales increased by nearly 20%, easily outpacing the 3% increase in volume of recycled heavy oil as prices rose and margins improved along with a rise in the price of crude oil. Furthermore, despite a rise in transportation costs related to collection of industrial waste (part of CoGS) and higher SG&A expenses incurred in relation to sales of recycled fuel and other products, the company still managed to increase its OPM by 1.0pp to 26.8% by negotiating higher prices to help absorb the higher costs.
Price negotiations are ongoing in anticipation of further increases in transportation costs, and margins on recycled fuel sales are widening even more as crude oil prices rise. Considering current market conditions and the fact that trends in selling prices for recycled heavy oil and procurement prices for raw materials (sump oil, which accounts for 70–80% of outside procurement costs) lag crude oil prices*, the company expects to see margins on recycled fuel continue to widen in 2H. The company said margin improvement added roughly JPY100mn to earnings in 1H, and it expects a total contribution of JPY300mn over the full year. Together with the expansion of the company's sales team (discussed below), this suggests to us that the company will be able to maintain a similar earnings structure from Q3 onward.
*Recycled heavy oil prices: Selling prices for recycled heavy oil normally lag crude oil prices by three to six months while procurement prices (for used oil) usually lag crude oil prices by more than six months. This means margins on recycled heavy oil tend to widen when crude oil prices are in an uptrend. In contrast, when crude oil prices are in a downtrend, the impact on selling prices of recycled heavy oil will be reflected much sooner and earnings will be depressed (as was seen in FY02/16). Taking into consideration the speed of price negotiations, the pace at which crude oil prices are currently rising appears to be desirable.
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Transportation costs: Daiseki Co. handles roughly 60% of its transportation in-house, but outsourced transportation has increased in tandem with volume growth, and labor shortages at outside contractors have also had an impact. Considering the government’s policy, Daiseki believes that transportation costs, including personnel for the tasks, are likely to rise going forward. However, in FY02/18, the company reviewed its pricing structure to reflect increases in distribution costs heading into FY02/19. It has conducted related negotiations, and as of the beginning of FY02/19 believed it could pass on most of this increase to prices. The company's current forecast assumes a 0.1pp decline in the gross profit margin in FY02/19.
Daiseki Eco. Solution (DES) Results Daiseki Eco. Solution (DES) logged sales of JPY10.9bn (+5.5% YoY), operating profit of JPY728mn (+5.0% YoY), recurring profit of JPY740mn (+4.8% YoY), net income attributable to owners of the parent of JPY437mn (+0.7% YoY). The subsidiary aggressively pressed on to expand into the recycling space mainly in its soil contamination research and cleanup business. It also worked to reduce costs at its plants. However, the competition in the market and the resulting drop in unit prices on orders, sluggish utilization rates at some recycling centers, and costs incurred on headquarters relocation weighed down results.
On January 7, 2019, DES announced a revision to its full-year earnings forecasts again. The subsidiary revised up its forecasts for profits as earnings have improved underpinned by a slowdown in the pace of unit price decline on orders and steady progress in the cost-cutting efforts at its plants.
In the soil contamination research and cleanup business, sales increased YoY thanks to robust demand in the Kanto region. Earnings improved as the drop in unit prices on orders have slowed down and the plants made progress in reducing costs. The Yatomi Recycling Center continued to improve profitability by focusing on selecting suitable processing projects and cutting costs.
In the plasterboard recycling business, DES marked solid gains in processing volumes in central and western Japan. Sales of solidifying agents remained strong, following the previous fiscal year trend.
Among other businesses, the biodiesel fuel business and the PCB consulting business also performed well, but sales fell on the conclusion of processing projects for general waste.
Order unit prices With unit prices on orders still coming down and the market environment turning soft, the drop in unit prices in 2H FY02/18 was not followed by a rebound in 1H FY02/19. It appears that these conditions were the result of suppliers that mainly handle soil that is not contaminated by construction waste or other materials not paying much attention to the handling of soil that did need to be cleaned and accepting orders at low prices. The fact that most of soil did not need to be cleaned and that companies competing for orders from the primary general contractors were motivated to offer low bids made for a highly competitive market environment. However, with prices having dropped about as far as they could go, the unit prices on orders Daiseki has been receiving have been basically flat since the second half of last year. Still, Daiseki's gross profit margin has taken a big hit. If the high-margin brownfield projects are excluded from 1H results, the gross profit margin would be around 14%, well below the 18.8% gross profit margin recorded in FY02/17 when DES did not have any brownfield projects.
The company plans to strengthen measures to counter the drop in unit prices on orders. Under the assumption that unit prices will not bounce back with changes in market factors only, the company looks to bring them up with its own efforts. Specifically, it looks to strengthen consulting sales to upstream, aggressively work to gain access to upstream information by leveraging the group’s strengths, and focus on winning value-added projects such as brownfield projects.
Regarding consulting sales, at the time DES was first listed on the stock exchange its main strength was its one-stop solutions service; from upstream it could take six month or more (sometimes as much as two years) to win consulting contracts. As DES's name recognition increased, it won an increasing number of contracts through general contractors, with some of these being very large in a scale and others requiring very short turnaround times (as little as two months), which resulted in weakened consulting sales. However, DES has recently reverted to a strategy of strengthening consulting sales, and related efforts have
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started to bear fruit in the form of orders with high unit prices, including a plant reconstruction project for a major company that is focused on CSR. By tapping into the parent company's strong client base of manufacturers, DES is looking to get advanced information on the detailed capital spending plans of manufacturers and use this information to get consulting projects and follow-on orders for soil remediation work. The company says it sees these efforts adding to bottom line results starting in 1H FY02/20.
Yatomi Recycling Center At the Yatomi Recycling Center, the company is focusing more on improving profitability than increase processing volumes (assuming it is processing soil that is suitable for cleaning, it may be able to improve its gross profit margin by 10pp or more). During FY02/18, the company sought to increase processing volume to build up its expertise in cleaning processes and increase the facility's capacity utilization rate. In FY02/19, however, DES focused on increasing processing of soil from the Tokai region and Western Japan, which are better suited to the decontamination process compared to the heavy clay soil of the Kanto region. Although the Yatomi Recycling Center continued running at a loss in 1H (and is still running at a loss of roughly JPY10mn per month), the earnings structure of the facility has improved to the extent that it is generating an operating profit excluding depreciation of JPY22mn per month. The facility plans to continue improving earnings through careful selection of treatment projects and cost reduction. By FY02/20, the company sees the Yatomi Recycling Center running in the black at the operating profit level thanks to higher operating rates and lower depreciation (because the capital expenditures associated with the Yatomi facility were very large, for most of the equipment the company is using fixed-rate declining-balance depreciation.)
New recycling centers DES is also in the process of building two new recycling centers, one in the city of Yokohama and one in Gifu Prefecture. These facilities are expected to contribute to results from FY02/20 onward, and at the earliest, might be up and running by January 2019. The new recycling facility in Yokohama is aimed at capturing the swell of demand around the time of the Tokyo Olympics; the one in Gifu Prefecture is aimed at meeting the demand stemming from the extensive tunnel construction being done for the Linear Chuo Shinkansen Line that will run through Gifu Prefecture. The company anticipates increases in related projects starting in FY02/20.
DES already has one recycling center in Yokohama but it is small, with a total lot size of 8,563sqm and the facility itself having 4,061sqm of floor space and processing capacity of 300,000 tons per annum. This compares with its Nagoya Recycling Center, which has a total lot size of 17,790sqm with the facility itself having 4,750sqm of floor space and processing capacity of 300,000 tons, and its Osaka Recycling Center, which has a total lot size of 10,670sqm with the facility itself having 6,184sqm of floor space and processing capacity of 300,000 tons. Moreover, unlike the recycling centers in Nagoya and Osaka, the company's existing recycling center in Yokohama does not have any berthing facilities to accommodate cargo ships. This increases its costs greatly because when ships arrive in port it needs to rent outside warehousing space and pay for land transportation between the port and the recycling center. According to reports, the new recycling center the company is building in Yokohama will have a total lot size of 15,059sqm and the processing facility itself will have 6,098sqm of floor space. As this will make it roughly the same size as the recycling centers in Nagoya and Osaka, the new Yokohama Recycling Center will be in a good position to win orders for large projects (which require a lot of space to store soil during processing). Because it will have berthing facilities for ships, it will also be able to cut out a lot of spending on outside contractors. In short, the enhanced features of the new recycling center in Yokohama will add to both the top- and the bottom-line results. Because the demand is there, the new Yokohama Recycling Center will ramp up operations quickly. Although the operating permits have not been granted yet, Shared Research would note that the likelihood of the permits being granted is high enough for the company's revised forecast to include depreciation for the months the recycling centers are expected to be in operation (roughly two months) in FY02/19.
Daiseki MCR
▷ Q3: Sales and profit both declined and fell short of forecasts, primarily due to impact from lower lead prices. The company expects to benefit from the 20% increase in processing capacity in Q4 ▷ Basel Convention Act: Demand trends starting in October 2018 (when export permits expired) were the focal point. Both domestic supply and demand slackened as domestic exports fell to virtually zero in November. This trend may lower purchase
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prices for the company Management plans to increase production capacity by 20% by shifting from five days of operation per week to six from December onward, which will require only three or four more employees. In the future the company is planning to operate seven days a week
System Kikou
▷ Q3: Booked extraordinary profit of just below JPY60mn on sales of equipment overseas. As high-margin projects are particularly numerous in Q4, earnings are expected to trend in line with forecasts over the full year.
1H FY02/19 results (out October 1, 2018)
▷ 1H: Operating profit up 5.4% YoY as gains at parent company offset lower earnings at subsidiaries; DES hit by decline in order unit prices (and has already issued downward revision), MCR hit by lower lead prices. Operating profit fell short of forecast by 3.5% due to the impact of completed-contract accounting at SKK, but SKK performed strong. Parent sales and earnings were up YoY and also above plan Versus 1H FY02/18: Consolidated operating profit up JPY242mn YoY, reflecting JPY509mn increase at parent, JPY60mn increase at DES, JPY105mn decline at MCR, and JPY231mn decline at SKK Versus plan: Consolidated operating profit came in JPY176mn below plan. If not for SKK's move to completed-contract
accounting, which left its operating profit JPY184mn below plan, the above-plan gains of JPY351mn at parent would have been enough to offset shortfalls of JPY228mn at DES and JPY137mn at MCR. Company sees earnings at MCR bouncing back in 2H but expects weakness at DES to remain a drag on overall earnings ▷ Parent: Growth in volumes and rise in recycled fuel margins continued to drive growth in gross profit. Price negotiations helped the company absorb rise in transportation costs. Due to a recovery in industrial production, previous measures to win clients (rise in market share) showed results, and led to an expansion in the collection volume. This positive momentum is expected to
continue into 2H ▷ DES: With no large, long-term projects to underpin earnings and a bearish market environment, DES was hurt by declining unit prices on orders; company looking to take steps to improve unit pricing in FY02/20 ▷ MCR: Declining lead prices weighed on earnings as the company finished writing down inventories. The company plans 20% increase in production capacity in December (Q4) to capture increase in demand following changes to Basel Convention Act ▷ 60-year anniversary: The company observed the 60-year anniversary of its founding on October 1, 2018 ▷ FY02/19 outlook: DES issued a downward revision to its sales and earnings estimates on September 14, 2018, lowering its full-year estimate for operating profit from JPY1.5bn to JPY740mn. Citing above-plan results at the parent, Daiseki has not revised its own forecast for full-year consolidated results ▷ FY02/20 outlook: Company sees favorable trends continuing at parent as macro environment holds steady and earnings at MCR getting boost from capacity expansion and lower depreciation. At DES, company is looking for startup of new recycling center in Yokohama to add to sales while group-wide efforts to raise unit prices and improved profitability at Yatomi recycling center to offset JPY200–300mn increase in depreciation burden
Results overview 1H FY02/19: Operating profit up 5.4% YoY as gains at parent offset lower earnings at subsidiaries. Excluding the impact of the move to completed-contract accounting at SKK, consolidated earnings finished in line with plan For 1H FY02/19, the company reported a 5.3% YoY increase in consolidated sales and a 5.4% (JPY242mn) increase in consolidated operating profit. Results at the parent company were up YoY and also above plan but results at three subsidiaries lagged badly, with operating profit down YoY at two of the three (the exception was DES) and below plan at all three subsidiaries.
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It was only because the parent accounts for the majority of sales and earnings that the company was able to offset most of the decline in earnings at its subsidiaries.
Results versus year-earlier Compared with the same period last year, operating profit at the parent company got a boost from higher volumes and higher selling prices for recycled heavy oil*. This drove the gains at the consolidated level, offsetting the decline in earnings at subsidiaries. At Daiseki Eco. Solution (DES), earnings were hurt by a lack of large, long-term projects and falling unit prices on orders (unit prices were roughly 10% lowered than expected). DES was able to log higher earnings, though, as it was finally able to book the sales and earnings from brownfield projects that had been previously delayed. At Daiseki MCR (MCR), the drop in earnings stemmed from lower-than-expected lead prices*. At System Kikou (SKK), capacity utilization rates and order bookings were good, but the switch to completed-contract accounting pushed more sales out into the second half of the fiscal year. In this relation, we would also note that SKK earnings tend to swing sharply from quarter to quarter.
Versus plan Aided by strong top-line gains, parent company Daiseki saw earnings finish above plan. In contrast, DES not only saw unit prices decline 10% more than expected as it battled competitors for market share, volumes were down, and the boost to earnings from the improvement in the capacity utilization rate at the Yatomi Recycling Center was less than expected. Earnings at MCR were hurt by a larger-than-expected decline in lead price, which were down 15% more than expected by August, forcing DES to write down inventories. At SKK, facilities were running at full capacity and order bookings were favorable, but the majority of sales are due to be booked in 2H.
DES announced a downward revision to its sales and earnings forecast on September 14, 2018, but Daiseki did not make any changes to its own forecast at the consolidated level. The company said there were a number of factors influencing its decision not to change its consolidated forecast for FY02/19. First, at parent company Daiseki, the favorable trends in the external operating environment (including domestic industrial production, crude oil prices, and foreign exchange rates) bode well for above-plan results again in 2H. Second, at DES, the company said there is little chance that results will be any worse than already indicated by the downward revision issued in September since it made the revision with the aim of avoiding a situation where it was forced to issue a second downward revision and order unit prices have been largely flat since then. Third, since MCD has already booked valuation losses on inventories, if lead prices do not to drop any further its earnings should start to improve from Q3. Also, improvements in procurement of raw materials and increases in production are expected from Q4 onward following changes in the Basel Convention Act. And finally, at SKK, order bookings have been favorable and sales and earnings are expected to be booked as projects are completed during the second half of the year.
Daiseki Co. (parent) Growth in volumes and rise in recycled fuel prices underpin continued growth in gross profit. Price negotiations conducted in advance absorb rise in transportation costs The parent reported a 11.1% (JPY1.6bn) YoY increase in sales and 13.5% (JPY509mn) rise in operating profit, with both sales and earnings coming in higher than expected. The above-plan results reflect an increase in gross profit stemming from successful measures to increase market share, and rising industrial production and an accompanying increase in both handling volumes and prices for recycled heavy oil. Operations in Hokuriku (except for Nagoya), Kanto, Kansai, Kyushu, and Chiba all logged record-high sales for 1H.
As the sluggish recovery of the industrial production index has continued, since FY02/17 the company has been working to implement a set of new operational measures designed to expand its market share. Thus, it has been working on increasing the order volume from its existing clients while at the same time winning new clients by strengthening its suite of sales support tools. Daiseki appears to be further pushing these efforts to expand its sales routes and market share and the number of new accounts and overall accounts has been steadily increasing. Since Q4 FY02/17, the industrial production index has been increasing YoY—combined with effects from winning clients, this resulted in earnings growth from Q1 FY02/18.
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There appears to have been no particular change to the company's cost structure. The GPM fell 0.6pp YoY in Q1, but this was because the Nagoya facility had a large, highly profitable project in FY02/18. Excluding this factor, the GPM remains favorable. In Q2, the GPM rose 0.6pp, aided by solid top-line growth and rising fuel prices. Recycled fuel sales increased by nearly 20%, easily outpacing the 3% increase in volume of recycled heavy oil as prices rose and margins improved along with a rise in the price of crude oil. Furthermore, despite a rise in transportation costs related to collection of industrial waste (part of CoGS) and higher SG&A expenses incurred in relation to sales of recycled fuel and other products, the company still managed to increase its OPM by 0.6pp to 26.7% by negotiating higher prices to help absorb the higher costs.
Price negotiations are ongoing in anticipation of further increases in transportation costs, and margins on recycled fuel sales are widening even more as crude oil prices rise. Considering current market conditions and the fact that trends in selling prices for recycled heavy oil and procurement prices for raw materials (sump oil, which accounts for 70–80% of outside procurement costs) lag crude oil prices*, the company expects to see margins on recycled fuel continue to widen in 2H. The company said the margin improvement in 1H added roughly JPY100mn to earnings in 1H and in 2H it may add another JPY100mn versus 1H. Together with the expansion of the company's sales team (discussed below), this suggests to us that the company will be able to maintain a similar earnings structure from Q3 onward.
*Recycled heavy oil prices: Selling prices for recycled heavy oil normally lag crude oil prices by three to six months while procurement prices (for used oil) usually lag crude oil prices by more than six months. This means margins on recycled heavy oil tend to widen when crude oil prices are in an uptrend. In contrast, when crude oil prices are in a downtrend, the impact on selling prices of recycled heavy oil will be reflected much sooner and earnings will be depressed (as was seen in FY02/16). Taking into consideration the speed of price negotiations, the pace at which crude oil prices are currently rising appears to be desirable.
Decline in number of accounts appears to be temporary We would note, however, that the number of active client accounts (which generated sales during 1H) suffered a temporary decline in 1H, falling 44 versus the end of FY02/18 to 5,514. This is the first time the company has seen a decline in its account numbers since 1H FY02/10 (when the number of accounts fell to 4,286, down 104 versus the end of FY02/09). The decline is due not so much to a loss of market share but rather a temporary shift in the focus of the company's sales team to price negotiations during 2H FY02/18. The price negotiations were successful, allowing Daiseki to raise recycled fuel selling price enough to cover the increases in transportation costs and the cost of raw materials (used oil). Now that this round of price negotiations has wound down, during 2H the company will refocus its efforts on winning new accounts with the aim of realizing a net increase in accounts by the end of FY02/19.
Transportation costs: Daiseki Co. handles roughly 60% of its transportation in-house, but outsourced transportation has increased in tandem with volume growth, and labor shortages at outside contractors have also had an impact. Considering the government’s policy, Daiseki believes that transportation costs, including personnel for the tasks, are likely to rise going forward. However, in FY02/18, the company reviewed its pricing structure to reflect increases in distribution costs heading into FY02/19. It has conducted related negotiations, and as of the beginning of FY02/19 believed it could pass on most of this increase to prices. The company's current forecast assumes a 0.1pp decline in the gross profit margin in FY02/19.
Daiseki Eco. Solution (DES) With no large, long-term projects to underpin earnings, DES was hurt by declining unit prices on orders and its failure to meet profit target at the Yatomi Recycling Center despite a rise in capacity utilization rate With no large, long-term projects to underpin earnings and sales and earnings hit by an increased in competition for orders and a resulting decline in unit prices, Daiseki Eco. Solution (DES) was forced to issue a downward revision to its 1H and full-year forecasts on September 14, 2018. Not only were unit prices roughly 10% lower than expected, volumes were also down. DES was still able to report gains versus the same period last year, though, thanks to JPY1.4bn worth of brownfield projects whose completion had been expected last year but was pushed out into this year. As a result, 1H sales at DES finished up 4.6% (JPY340mn) YoY and 4.5% (JPY372mn) below plan while operating profit was up 11.1% YoY (+JPY60mn) and 27.6% (JPY228mn) below plan.
The shortfall versus forecast was attributed to an absence of large, long-term projects and a decline in demand that led to heightened competition for medium and small projects and pushed unit prices down roughly 10% more than initially expected; a decline in processing volumes; and an ongoing decline in unit prices on orders, leaving the Yatomi Recycling Center with an
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operating loss despite a 10pp increase in its capacity utilization rate. The drop in unit prices on orders placed since 2H FY02/18 weighed especially heavily on earnings. With transportation costs going up as carriers hike rates and no way to bring down raw materials procurement costs, the full impact of the decline in unit prices fell directly on earnings.
Breakdown of cost of goods sold: The detailed breakdown of cost of goods sold released by Daiseki for FY02/14 shows outsourcing costs (processing fees paid to cement makers) accounting for 47% of the costs of goods sold at the soil contamination and cleanup business operated by the parent (which accounts for the largest part of sales) and transportation costs 15%. These are both variable costs. As all of the other costs were largely fixed costs, like depreciation, the company has very little room to reduce the cost of goods sold.
Order unit prices With unit prices on orders still coming down and the market environment turning soft, the drop in unit prices in 2H FY02/18 was not followed by a rebound in 1H FY02/19. It appears that these conditions were the result of suppliers that mainly handle soil that is not contaminated by construction waste or other materials not paying much attention to the handling of soil that did need to be cleaned and accepting orders at low prices. The fact that most of soil did not need to be cleaned and that companies competing for orders from the primary general contractors were motivated to offer low bids made for a highly competitive market environment. However, with prices having dropped about as far as they could go, the unit prices on orders Daiseki has been receiving have been basically flat since the second half of last year. Still, Daiseki's gross profit margin has taken a big hit. If the high-margin brownfield projects are excluded from 1H results, the gross profit margin would be around 14%, well below the 18.8% gross profit margin recorded in FY02/17 when DES did not have any brownfield projects.
The company plans to strengthen measures to counter the drop in unit prices on orders. Under the assumption that unit prices will not bounce back with changes in market factors only, the company looks to bring them up with its own efforts. Specifically, it looks to strengthen consulting sales to upstream, aggressively work to gain access to upstream information by leveraging the group’s strengths, and focus on winning value-added projects such as brownfield projects.
Regarding consulting sales, at the time DES was first listed on the stock exchange its main strength was its one-stop solutions service; from upstream it could take six month or more (sometimes as much as two years) to win consulting contracts. As DES's name recognition increased it won an increasing number of contracts via general contractors and, with some of these being very large and some with very short turnaround times (as little as two months), its commitment to consulting services gradually dwindled. However, starting in 2H the company is determined to get back to its roots and resume consulting sales in earnest. By tapping into the parent company's strong client base of manufacturers, DES is looking to get advanced information on the detailed capital spending plans of manufacturers and use this information to get consulting projects and follow-on orders for soil remediation work. The company says it sees these efforts adding to bottom-line results starting in 1H FY02/20.
Daiseki MCR
▷ 1H: Lead prices fell in Q1, pushing up the percentage of sales from high-cost inventory and the CoGS-to-sales ratio. In Q2 lead prices declined further in July, forcing the company to book roughly JPY80mn in inventory valuation losses, and earnings were further depressed by three-week long planned maintenance in August. The company aims to get back into the black in Q3 and expects to benefit from the 20% increase in processing capacity in Q4 ▷ Basel Convention Act: The focus is on an increase in demand from October, when export permits expire. Exports were already down by 50% YoY in August and expected to drop to nearly zero in October. The company plans to increase production capacity by 20% by shifting from five days of operation per week to six from December onward, which will require only three or four more employees. In the future the company is planning to operate seven days a week As brokers will no longer be able to export to South Korea, the company expects improved margins as procurement prices fall With buying by brokers and fluctuations in the foreign exchange rate (with the South Korean won) no longer driving swings in lead prices, there is a good chance that MCR's costs will more directly reflect prices in the lead market ▷ FY02/19: MCR is expected to finish the full year in the black but may finish roughly JPY30mn below plan, though this shortfall is expected to be fully offset by strong results at parent Daiseki
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System Kikou
▷ 1H: SKK saw sluggish 1H results as the amount of sales bookings pushed out to 2H as a result of its switch to completed-contract accounting exceeded expectations. Business itself was good, with plants running at full capacity and SKK constantly short of capacity and people. The earthquake that hit the Iburi region in eastern Hokkaido forced local operations to shut down for two to three weeks
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Other information
News
January 2019 On January 7, 2019, Daiseki Eco. Solution Co., Ltd. (“DES”; TSE: 1712) announced a revision to its full-year FY02/19 earnings forecasts.
Revised FY02/19 forecasts
▷ Sales: JPY14.4bn (previous forecast: JPY14.6bn) ▷ Operating profit: JPY810mn (JPY740mn) ▷ Recurring profit: JPY820mn (JPY730mn) ▷ Net income: JPY500mn (JPY440mn) ▷ EPS: JPY29.72 (JPY26.16)
* Net income is net income attributable to owners of the parent.
Reason for the revision Earnings improved as the drop in unit prices on orders (caused by heavy competition) in the soil contamination research and cleanup business stabilized and cost reduction efforts at DES plants made steady progress.
On the same day, the company announced a revision to its FY02/19 dividend forecast.
In light of the projected FY02/19 earnings results and progress of the medium-term plan, the company revised up its dividend forecast from JPY40 to JPY46 per share.
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History
Timeline
▷ 1945 Founded as a petrol refiner in Mie Prefecture ▷ 1958 Constructed a plant for lubricating oil refining in Nagoya city, Aichi Prefecture ▷ 1958 Established Daido Petrochemical Industry Co., Ltd (Common stock: 2,000,000JPY, as of October 1) ▷ 1963 Opened Nagoya Work in Nagoya city ▷ 1966 Opened Kyushu Work in Kita-Kyushu city, Fukuoka Prefecture ▷ 1970 Opened Hokuriku Daiseki Co., Ltd. in Kanazawa city, Ishikawa Prefecture ▷ 1972 Qualified as an industrial waste disposer in Nagoya city ▷ 1973 Opened Hokuriku Work in Hakusan city, Ishikawa Prefecture ▷ 1980 Opened Osaka Work in Amagasaki city, Hyogo Prefecture ▷ 1982 Opened Kyushu Work in Kita-Kyushu city ▷ 1983 Awarded a prize by the Clean Japan Center Foundation for our contribution to resource recycling ▷ 1984 Changed corporate name to Daiseki Co., Ltd. ▷ 1990 Opened Kanto Work in Sano city, Tochigi Prefecture ▷ 1995 Listed on OTC market (July 27, 1995; Common stock: 1,207,000,000 yen) ▷ 1997 Opened Chiba Work in Sodegaura City, Chiba Prefecture ▷ 1997 Received the Secretary of the Minister of Health and Welfare Prize for improvement of the environment ▷ 1998 Received the Secretary of the Maritime Safety Agency Prize and the Governor of the Maritime Disaster Prevention Center Prize for our restoration work on the fuel oil spill from a Russian tanker in the Sea of Japan ▷ 1999 Changed corporate name of Daiseki Plant Co., Ltd. to Daiseki Kankyo Eng. Co., Ltd. ▷ 1999 Listed in the second section of the Tokyo Stock Exchange, Inc. and Nagoya Stock Exchange (Common stock: 1,381,473,500 yen, as of August 5) ▷ 2000 Listed in the First Section of the Tokyo Stock Exchange, Inc. and the Nagoya Stock Exchange (Common stock: 2,575,458,956 yen, as of August 1) ▷ 2000 Offered for public subscription (Common stock: 3,701,058,956 yen, as of September 1) ▷ 2002 Opened Kansai Work in Akashi city, Hyogo Prefecture ▷ 2004 Changed corporate name of Daiseki Kankyo Eng. Co., Ltd. to Daiseki Eco. Solution Co., Ltd. ▷ 2004 Daiseki Eco Solution Co., Ltd. was listed in the MOTHERS of Tokyo Stock Exchange ▷ 2005 Nagoya Recycle Center of Daiseki Eco Solution Co., Ltd. was accredited as a contaminated soil purification facility by Nagoya Prefecture. ▷ 2007 Offered for public subscription 2,200,000 shares and third-party allocation 330,000 shares (as of April 25 and May 22, Common stock 6,382,605,956 yen) ▷ 2007 Acquired Tamura Sangyo Co., Ltd. (Utsunomiya city, Tochigi Prefecture） ▷ 2008 Daiseki Eco Solution Co., Ltd. was listed in the First Section of the Tokyo Stock Exchange and the Nagoya Stock Exchange ▷ 2008 Changed corporate name of Tamura Sangyo Co., Ltd. to Daiseki MCR Co., Ltd. ▷ 2008 Established Green Arrows Central Co., Ltd. ▷ 2010 Acquired System Kikou shares ▷ 2012 Established Green Arrows Kyushu Co., Ltd. ▷ 2015 Daiseki MCR completes construction of Utsunomiya Recycling Center ▷ 2017 Daiseki Eco. Solution completes construction of Yatomi Recycling Center
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▷ 2018 Daiseki Eco. Solution completes construction of Yokohama Ebisu Recycling Center
Daiseki did not start out as an environmental services company; the company’s roots began in 1945 as a gasoline refiner. The company initially started recycling in order to cut costs, but developed expertise which created the platform for a business which it formally entered in 1958 when Daido Petrochemical Industry Ltd. was founded. The first recycling plant was established in Nagoya in 1963, later followed by steady expansion across Japan. The company received a license to recycle in 1972. The company’s name changed to Daiseki in 1984. Over the counter trading of the company’s shares began in 1995, with a listing on the Tokyo Stock Exchange 2nd section in 1999 (transferring to the 1st section in 2000).
Top management Chairman Hiroyuki Ito (born April 5, 1943) After joining the company in 1963, Ito was appointed as a director in 1975, senior managing director in 1978, representative director and vice president in 1990, and president in 1996. He was appointed chairman of the board of directors in March 2015. (Shares held as of end-February 2018: 1.0mn.)
President Hideki Hashira (born December 18, 1960) Hashira joined The Tokai Bank, Ltd. (now MUFJ Bank, Ltd.) in April 1984, after graduating from the School of Economics, Osaka University in March of that year. He joined Daiseki in April 1990 and became director in August of the same year. He was appointed managing director in October 1995, representative director and vice president in 1999, and president in March 2015. (Shares held as of end-February 2018: 302,000.)
Directors and corporate auditors As of May 26, 2016, Daiseki has become a company with audit and supervisory committee. The purpose is to strengthen the audit function of the board of directors and to improve the health and transparency of management. The company has 13 directors (of whom three are corporate auditors). Two of the directors are from outside the organization (corporate auditors). As a rule, the board meets once a month, the managing directors meet once a week, management meeting (attended by the directors, facility managers, and directors of consolidated subsidiaries) is held on a monthly basis, and the audit and supervisory committee likewise meets once a month.
Employees
Employee count
1,000 949 Daiseki Co. Daiseki Eco. Solution Daiseki MCR Other 908 865 900 834 78 818 76 770 778 72 78 800 722 742 72 72 70 60 69 63 659 75 65 154 700 67 77 65 148 11 66 138 69 73 104 119 600 68 87 94 86 88 84 500
400
300 612 639 548 556 569 578 595 494 498 508 200
100
0 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16FY02/17FY02/18 FY02/19 Employees (cons.) 659 722 742 770 778 818 834 865 908 949 Daiseki Co. 494 498 508 548 556 569 578 595 612 639 Daiseki Eco Solution 86 88 84 87 94 104 119 138 148 154 Daiseki MCR 68697366657565607278 Other 11677769637072727678 Source: Shared Research based on company data
65/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Major shareholders
Shares held Shareholding Top shareholders ('000) ratio Japan Trustee Services Bank, Ltd. 5,808 13.58% Goldman Sachs & Co. Reg (Standing proxy: Goldman Sachs Securities Co., Ltd.) 4,073 9.52% The Master Trust Bank of Japan, Ltd. 2,960 6.92% State Street Bank and Trust Company (Standing proxy: Mizuho Bank, Ltd. Settlement Department) 2,688 6.28% JP Morgan Chase Bank (Standing proxy: Mizuho Bank, Ltd. Settlement Department) 2,495 5.83% NORTHERN TRUST CO. (AVFC) RE 10PCT TREATY ACCOUNT (Standing proxy: The Hongkong and Shang 1,454 3.40% Kodomo Mirai Kenkyujo Limited 1,370 3.20% MUFG Bank, Ltd. 1,323 3.09% Tetsuya Yamamoto 1,213 2.83% Hiroyuki Ito 1,049 2.45% SUM 24,436 57.14% Source: Shared Research based on company data (As of end-February, 2019)
Dividends and shareholder returns
Dividends Daiseki’s dividend policy is to ensure stable shareholder returns, placing top priority on dividend payment and shareholder returns in line with earnings results. The company adopts a policy of determining the dividends in view of earnings, the market environment, and payout ratio. In addition, it takes into consideration the need to strengthen its management base and financial position, as well as to retain sufficient internal reserves in preparation for medium-term growth.
Daiseki’s basic policy is to pay interim and year-end dividends from its capital surplus, at; pay out 30% or higher of the parent company’s earnings; and ensure shareholder return in line with improved earnings in the form of increased dividend per share or stock splits. FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total dividends a) 900 900 945 990 1,080 1,234 1,248 1,709 1,967 Total treasury stock acquired b) 111442,669 1,21712 Total returns to shareholders c) = a) + b) 901 901 946 994 1,084 3,903 2,465 1,710 1,969 Net income attributable to parent company shareholder d) 3,114 3,194 3,024 3,942 4,035 3,847 4,132 5,833 6,110
Dividend payout ratio a) / d) 28.9% 28.2% 31.3% 25.1% 26.8% 32.1% 30.2% 29.3% 32.2% Total shareholder return ratio c) / d) 28.9% 28.2% 31.3% 25.2% 26.9% 101.5% 59.7% 29.3% 32.2%
Net assets available to common 41,769 44,009 46,277 48,462 51,540 54,667 54,647 56,397 60,982 shareholders (year-end) Avg. of beginning and end of year f) 40,874 42,889 45,143 47,370 50,001 53,104 54,657 55,522 58,690 Before deducting assets available to 41,769 44,009 46,277 48,462 51,540 54,667 54,647 56,397 60,982 holders of Class A preferred shares EPS (JPY) 69.2 70.9 67.2 87.5 89.6 85.8 95.8 136.5 142.9 Dividend per share (JPY) 20.0 20.0 21.0 22.0 24.0 28.0 29.0 40.0 46.0 DOE a) / f) 2.2% 2.1% 2.1% 2.1% 2.2% 2.3% 2.3% 3.1% 3.4% 120% 4% Payout ratio Total shareholder return ratio DOE 3.4% 100% 3.1% 3% 80% 2.3% 2.2% 2.3% 2.1% 2.1% 2.1% 2.2% 60% 2%
40% 1% 32.1% 32.2% 28.9% 31.3% 30.2% 29.3% 20% 28.2% 25.1% 26.8%
0% 0% FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Source: Shared Research based on company data
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Investor relations
Result meetings are held after the announcement of interim and fiscal year-end results. The company maintains a comprehensive IR site, with detailed information in both English and Japanese. Company profile
Company Head office 1-86 Funamicho Minato-ku Nagoya-shi Daiseki Co., Ltd. Aichi, Japan 455-8505 Phone Listed Tokyo Stock Exchange 1st Section, +81-52-611-6322 Nagoya Stock Exchange 1st Section Established Exchange listing October 1, 1958 July 27, 1995 Website Financial year-end http://www.daiseki.co.jp/english/index.html February IR Web http://www.daiseki.co.jp/english/IR/index.html -
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