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The shares of gas producers have shone in recent years with price increases and dividends. Nippon Sanso, the number one in Japan, however, has some catching up to do. But management now seems to be pulling the right levers. As a Japanese manufacturer, Nippon Sanso could also benefit doubly from trends in the global economy.
Warren Buffett turns his attention back to Japan
For some time now, analysts have been praising the low valuations and the resulting opportunities in Japanese equities. Apparently, there seems to be a pent-up demand here. Warren Buffett recently turned the spotlight back on the island. The investor from Omaha had already invested in August 2020 with his investment holding Berkshire Hathaway a total of more than six billion U.S. dollars in the five major Japanese trading companies Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo. Now, in an interview with the Japanese media portal Nikkei, he announced that he has increased his stakes in the conglomerates.
Nippon Sanso: Japan’s number one gas producer!
However, Buffett has opted for the easier way. These companies are all conglomerates. They do business in commodities, food, shipping, steel or textiles. They generally benefit from Japan’s growth. In this respect, this investment corresponds to a country play. However, there are also focused individual stocks that are worth a look. These include Nippon Sanso Holdings Corporation (18.83 € | JP3711600001). The company was founded in Tokyo in 1910 and is now one of the largest gas producers in the world.
What does Nippon Sanso do?
Nippon Sanso Corporation specializes in the manufacture of gases and gas equipment. The company produces a wide range of gases such as oxygen, nitrogen, hydrogen, argon and carbon dioxide, which are used in various industries such as electronics, metallurgy, food processing, chemicals and healthcare. In addition, Nippon Sanso also provides gas plant maintenance, technical support and consulting services to its customers. This makes the company, in effect, an infrastructure play like the German-American company Linde.
Nippon Sanso: profit growth in Europe and North America
Nippon Sanso operates globally and posted strong growth in the fourth quarter of 2022. Sales increased by 23 percent, with the company benefiting from the weak Yen. On the profit side, however, the domestic market weakened. Higher energy costs could not be passed on to customers, so EBIT fell by 13 percent – despite a 13 percent increase in sales. By contrast, EBIT outside Japan grew at an above-average rate. In Europe, EBIT rose by 28 percent on revenue growth of 12 percent. In the USA, EBIT even increased by 29 percent on sales growth of 11 percent. It appears that these regions were better able to pass on increased costs, and as a result almost two-thirds of profits are already coming from Europe and the US.
In our opinion, however, Nippon Sanso’s management has now pulled the right levers to score points in the domestic market as well. An “Action Plan” has been launched, which is necessary due to the fact that inflation in Japan is now rising for the first time in 30 years. On the one hand, management wants to increase prices. In addition, inflation clauses are to be included in new contracts. Last but not least, the company is also working on productivity increases. All this should gradually translate into higher profits in the domestic market. The past shows that this is possible: operating cash flow has been continuously increased for years.
An overview is provided by the following video of the company, which first describes the general business model and later the package of measures.
Gas producers benefit from global trends
Of course, gas producers also feel it when there are economic problems. In the long term, however, they are likely to be among the winners in the global economy. Even in recent years, major suppliers such as Linde have been able to significantly increase their margins. It helps that many processes cannot be implemented at all without the right gases; and that applies not only to the chemical industry, but also to many high-tech industries. Secondly, Nippon Sanso is expanding into the hydrogen sector in order to benefit from the global decarbonization wave. Here, it is attacking all markets: From the U.S. to Europe to India, Australia and, of course, Japan. In the short term, the action plan should help to increase margins.
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However, the stock also has two disadvantages: the company only pays out 20 to 25 percent of its profits as dividends. In many Western companies, this figure is significantly higher. Secondly, Nippon Sanso must reduce its high level of debt. With its own measures, this can be achieved in the coming years. Last but not least, investors should look at the valuation compared to the competition. The P/E ratio for 2024 is 14, the price-slea-ratio is 1.1, which is significantly lower than comparable companies from the U.S. and Europe.
Share with moat
Our conclusion: Nippon Sanso’s stock is an infrastructure play for long-term investors. Its low valuation compared to its peer group, unrealized potential in profit margins in its home market, and steady demand growth provide opportunities for earnings growth and balance sheet improvements. In addition, expansion into hydrogen should pay off in the medium to long term. Gas producers are also benefiting doubly from global economic developments. Demand in industrializing countries such as India is rising disproportionately. Here, Japanese companies are likely to have an advantage over competitors from China. Secondly, demand from high-tech industries is increasing. Last but not least, market entry barriers in the gas business are high, resulting in pricing power for suppliers like Nippon Sanso. After a multi-year run, the stock has shown a sideways trend over the past two years. Savvy investors with a long term view can enter the stock in a staggered manner!
Please note: Investments in the capital markets are associated with a high level of risk. Investors can lose all of their capital – and more. Remember to do your own due diligence! The content of this website is intended exclusively for readers who are permanent residents of Germany. The German disclaimer applies (see below).
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harts/Tabellen: Das Investor Magazin, Nippon Sanso
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