Leading Japanese maker of carbide miniature end mills with sound financials, aiming for growth by keeping with the miniaturization trend of end products.
NS Tool specializes in manufacture and sale of carbide end mills, dominating the small-diameter segment of the market for these ultra-hard cutting tools with a market share of more than 75% for end mills with blade-tip diameters of 6mm or less. As demand for precision processing of components has grown along with the electrification of home appliances, the spread of smartphones and other mobile devices, and the increasing use of electronics and preventive safety technologies in cars, so too has demand for the small-diameter end mills that are used in the processing of molds and components. In addition to expanding its share of the growing domestic market for small-diameter end mills, NS Tool has also grown its business by building its presence overseas.
All of the products manufactured by NS Tool are made in Japan, as the company has concentrated its production base entirely in Japan, even going so far as to develop its own production equipment. By developing its own production equipment and systems, the company has built up expertise in factory automation and labor-saving layouts while at the same time reducing the cost of its investments in plant and equipment. With increasing factory automation, the company is able to increase employee productivity, and by concentrating production it is able to maximize the benefits of mass production. Its advanced expertise in production management allows NS Tool to consistently supply high-quality products to its customers, further increasing its competitive edge. Operating profit margin came to 18.7% in FY03/21.
Looking ahead, the company sees demand continuing to grow for small-diameter end mills, which will be essential for the precision processing needed for the new products coming down the line with advances in telecommunications equipment, including the rollout of next-generation mobile phones. The spread of IoT-linked equipment will also depend on devices that include ultra-high precision components and, in the automotive sector, the electrification of cars and the growing number of vehicles with self-steering technology on board is also expected to lead to more electronic parts being loaded into cars. Overseas sales rose to a record high of 30.8% in FY03/21, and the company is looking to further increase sales outside Japan by steadily increasing its brand recognition and building up its overseas sales and customer support network.
Trends and outlook
FY03/21: For FY03/21, sales were JPY8.1bn (-15.0% YoY), operating profit was JPY1.5bn (-31.8% YoY) and net income was JPY1.2bn (-21.4% YoY). Although this was ahead of the company’s forecasts (operating profit JPY1.5bn and net income of JPY1.1bn), this was the second consecutive year of significant declines. Although sales picked up toward the end of the year, this could not offset the impact of the decrease in domestic automobile production in 1H and the impact of inventory reductions of company products at the distribution level. There is no change in the dividend forecast for the second half (JPY25.0/share), and the full year dividend is expected to be JPY35.0/ share (JPY45.0/share in the previous year). Although the company was forced to lower its full year dividend after cutting its dividend reduction in 1H, the payout ratio remained at 36.0% (36.4% in the previous year).
FY03/22 forecast: The current forecast calls for sales of JPY9.2bn (+13.2% YoY), operating profit of JPY1.9bn (+26.9% YoY), recurring profit of JPY1.9bn (+12.7% YoY), net income of JPY1.3bn (+9.5% YoY), and EPS of JPY53.1. The company left its previous forecast unchanged at the time of the Q2 results announcement, taking account of various risk factors. The full year dividend forecast is JPY20.0/share, but this reflects the 2-for-1 stock split implemented on April 1, 2021, so on a pre-split basis, the dividend forecast would be JPY40.0/share.
Strengths and weaknesses
Shared Research thinks NS Tool’s strength lies in its focus on the core area of expertise, growing end markets, and its strong production technologies; its weaknesses include multiple-product, small-lot production, its dependence on outside distributors, and its need for a steady supply of scarce metals. (For further details, see the Strengths and weaknesses section.)
Key financial data
Income statement
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Est.
Sales
5,998
6,419
7,403
8,382
8,826
9,767
10,476
9,531
8,100
9,170
YoY
3.7%
7.0%
15.3%
13.2%
5.3%
10.7%
7.3%
-9.0%
-15.0%
13.2%
Gross profit
2,844
3,076
3,707
4,390
4,824
5,529
5,930
5,224
4,138
-
YoY
3.8%
8.2%
20.5%
18.4%
9.9%
14.6%
7.2%
-11.9%
-20.8%
-
Gross profit margin
47.4%
47.9%
50.1%
52.4%
54.7%
56.6%
56.6%
54.8%
51.1%
-
Operating profit
922
1,069
1,481
1,914
2,013
2,696
2,880
2,219
1,513
1,920
YoY
-4.3%
16.0%
38.5%
29.3%
5.2%
33.9%
6.8%
-22.9%
-31.8%
26.9%
Operating profit margin
15.4%
16.7%
20.0%
22.8%
22.8%
27.6%
27.5%
23.3%
18.7%
20.9%
Recurring profit
952
1,107
1,534
1,955
2,026
2,734
2,895
2,232
1,712
1,930
YoY
-7.8%
16.3%
38.6%
27.4%
3.7%
34.9%
5.9%
-22.9%
-23.3%
12.7%
Recurring profit margin
15.9%
17.2%
20.7%
23.3%
23.0%
28.0%
27.6%
23.4%
21.1%
21.0%
Net income
527
695
973
1,343
1,421
1,903
1,970
1,546
1,214
1,330
YoY
-1.5%
31.7%
40.1%
37.9%
5.8%
34.0%
3.5%
-21.6%
-21.4%
9.5%
Net margin
8.8%
10.8%
13.1%
16.0%
16.1%
19.5%
18.8%
16.2%
15.0%
14.5%
Per-share data (split-adjusted; JPY)
Shares issued (year-end; '000)
25,008
25,008
25,008
25,008
25,008
25,008
25,008
25,008
25,011
-
EPS
21.1
27.8
38.9
53.7
56.8
76.1
78.8
61.8
48.6
53.1
Dividend per share
4.9
7.5
10.0
12.5
20.0
22.5
22.5
22.5
17.5
20.0
Payout ratio
23.1%
27.0%
25.7%
23.3%
35.2%
29.6%
28.6%
36.4%
36.0%
37.6%
Book value per share
284
307
339
383
427
480
536
575
605
-
Balance sheet (JPYmn)
Cash and deposits
1,914
2,856
3,717
3,898
4,659
6,325
6,210
5,784
7,674
Accounts receivable
832
1,095
1,264
1,333
1,422
1,508
1,531
1,366
1,312
Inventories
1,383
1,467
1,509
1,467
1,593
1,745
2,056
2,201
1,759
Total current assets
4,337
5,626
6,711
6,978
7,971
9,985
9,932
9,556
10,895
Tangible fixed assets
3,654
3,117
3,172
3,893
4,048
4,010
4,686
5,748
5,477
Intangible assets
45
29
143
148
118
156
84
53
34
Long-term deposits
-
-
-
-
-
-
-
-
-
Investments and other assets
262
304
313
353
381
316
679
661
529
Total assets
8,298
9,076
10,339
11,372
12,518
14,467
15,381
16,018
16,936
Accounts payable
99
226
277
272
230
281
278
208
221
Short-term debt
-
-
-
-
-
-
-
-
-
Total current liabilities
875
1,029
1,440
1,356
1,355
1,962
1,644
1,265
1,385
Long-term debt
-
-
-
-
-
-
-
-
-
Total fixed liabilities
316
367
419
446
496
504
276
255
225
Total liabilities
1,192
1,396
1,859
1,802
1,851
2,465
1,920
1,520
1,610
Total net assets
7,106
7,680
8,480
9,570
10,667
12,002
13,462
14,498
15,326
Cash flow statement (JPYmn)
Cash flows from operating activities
731
1,147
1,619
1,757
1,895
2,910
1,869
1,909
2,526
Cash flows from investing activities
-886
-82
-594
-1,322
-787
-657
-1,383
-1,770
-187
Cash flows from financing activities
-109
-122
-187
-251
-500
-563
-563
-563
-438
Net cash
1,914
2,856
3,717
3,898
4,659
6,325
6,210
5,784
7,674
ROA (RP-based)
11.7%
12.7%
15.8%
18.0%
17.0%
20.3%
19.4%
14.2%
10.4%
ROE
7.7%
9.4%
12.0%
14.9%
14.0%
16.8%
15.5%
11.1%
8.1%
Equity ratio
85.6%
84.6%
82.0%
84.2%
85.2%
83.0%
87.5%
90.5%
90.5%
R&D expenses
207
231
232
304
367
330
296
365
388
Depreciation and amortization
564
534
475
505
632
625
629
698
707
713
Capital expenditures
1,001
469
612
1,295
774
663
1,268
1,755
462
589
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: On October 1, 2012, on October 1, 2014, on January 1, 2017, and on April 1, 2021, the company implemented a 2-for-1 stock split (the per share data above has been adjusted retroactively).
Trends and outlook
Quarterly trends and results
Cumulative
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
% of Est.
1H Est.
Sales
2,466
4,932
7,322
9,531
1,935
3,636
5,836
8,100
2,445
4,821
103.7%
4,650
YoY
-8.2%
-6.0%
-8.2%
-9.0%
-21.6%
-26.3%
-20.3%
-15.0%
26.4%
32.6%
27.9%
Gross profit
1,466
2,770
4,029
5,224
989
1,735
2,890
4,138
1,261
2,511
YoY
-7.1%
-8.3%
-11.2%
-11.9%
-32.6%
-37.4%
-28.3%
-20.8%
27.5%
44.7%
Gross profit margin
59.4%
56.2%
55.0%
54.8%
51.1%
47.7%
49.5%
51.1%
51.6%
52.1%
SG&A expenses
715
1,507
2,201
3,005
637
1,331
1,957
2,625
679
1,397
YoY
-10.7%
-3.3%
-6.3%
-1.5%
-10.9%
-11.7%
-11.1%
-12.7%
6.6%
4.9%
SG&A ratio
29.0%
30.6%
30.1%
31.5%
32.9%
36.6%
33.5%
32.4%
27.8%
29.0%
Operating profit
751
1,263
1,828
2,219
352
404
933
1,513
582
1,114
113.7%
980
YoY
-3.4%
-13.6%
-16.4%
-22.9%
-53.2%
-68.0%
-49.0%
-31.8%
65.5%
175.7%
142.5%
Operating profit margin
30.5%
25.6%
25.0%
23.3%
18.2%
11.1%
16.0%
18.7%
23.8%
23.1%
21.1%
Recurring profit
752
1,265
1,832
2,232
354
444
1,124
1,712
590
1,131
114.2%
990
YoY
-3.4%
-13.8%
-16.5%
-22.9%
-53.0%
-64.9%
-38.7%
-23.3%
66.8%
154.6%
122.9%
Recurring profit margin
30.5%
25.7%
25.0%
23.4%
18.3%
12.2%
19.3%
21.1%
24.1%
23.5%
21.3%
Net income
481
833
1,227
1,546
232
275
760
1,214
392
771
115.1%
670
YoY
-1.2%
-14.4%
-18.0%
-21.6%
-51.7%
-67.0%
-38.0%
-21.4%
68.7%
180.2%
143.5%
Net margin
19.5%
16.9%
16.8%
16.2%
12.0%
7.6%
13.0%
15.0%
16.0%
16.0%
14.4%
Quarterly
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
% of Est.
FY Est.
Sales
2,466
2,466
2,390
2,209
1,935
1,701
2,200
2,265
2,445
2,376
52.6%
9,170
YoY
-8.2%
-3.7%
-12.5%
-11.6%
-21.6%
-31.0%
-8.0%
2.5%
26.4%
39.6%
13.2%
Gross profit
1,466
1,304
1,259
1,195
989
747
1,154
1,248
1,261
1,250
YoY
-7.1%
-9.7%
-16.9%
-14.2%
-32.6%
-42.7%
-8.3%
4.4%
27.5%
67.4%
Gross profit margin
59.4%
52.9%
52.7%
54.1%
51.1%
43.9%
52.5%
55.1%
51.6%
52.6%
SG&A expenses
715
792
694
804
637
694
625
668
679
718
YoY
-10.7%
4.4%
-12.1%
14.7%
-10.9%
-12.4%
-9.9%
-16.9%
6.6%
3.4%
SG&A ratio
29.0%
32.1%
29.0%
36.4%
32.9%
40.8%
28.4%
29.5%
27.8%
30.2%
Operating profit
751
512
565
391
352
52
529
580
582
532
58.0%
1,920
YoY
-3.4%
-25.3%
-22.0%
-43.5%
-53.2%
-89.8%
-6.3%
48.2%
65.5%
917.1%
26.9%
Operating profit margin
30.5%
20.7%
23.6%
17.7%
18.2%
3.1%
24.0%
25.6%
23.8%
22.4%
20.9%
Recurring profit
752
513
566
400
354
91
679
589
590
541
58.6%
1,930
YoY
-3.4%
-25.5%
-22.1%
-42.9%
-53.0%
-82.4%
20.0%
47.3%
66.8%
497.6%
12.7%
Recurring profit margin
30.5%
20.8%
23.7%
18.1%
18.3%
5.3%
30.9%
26.0%
24.1%
22.8%
21.0%
Net income
481
351
394
319
232
43
485
454
392
379
58.0%
1,330
YoY
-1.2%
-27.7%
-24.8%
-32.7%
-51.7%
-87.9%
23.1%
42.3%
68.7%
787.7%
9.5%
Net margin
19.5%
14.3%
16.5%
14.4%
12.0%
2.5%
22.1%
20.0%
16.0%
15.9%
14.5%
Source: Shared Research based on company data
Sales by region
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Sales
2,466
2,466
2,390
2,209
1,935
1,701
2,200
2,265
2,445
2,376
YoY
-8.2%
-3.7%
-12.5%
-11.6%
-21.6%
-31.0%
-8.0%
2.5%
26.4%
39.6%
Domestic sales
1,783
1,620
1,669
1,541
1,343
1,151
1,522
1,589
1,707
1,603
YoY
-9.4%
-11.8%
-14.0%
-15.8%
-24.7%
-29.0%
-8.8%
3.1%
27.1%
39.3%
% of total
72.3%
65.7%
69.8%
69.8%
69.4%
67.7%
69.2%
70.2%
69.8%
67.5%
Overseas sales
683
844
719
667
591
549
676
679
737
772
YoY
-4.7%
16.6%
-8.9%
0.2%
-13.5%
-35.0%
-6.0%
1.8%
24.7%
40.6%
% of total
27.7%
34.2%
30.1%
30.2%
30.5%
32.3%
30.7%
30.0%
30.1%
32.5%
China, Hong Kong, Taiwan
264
458
320
311
301
254
302
307
332
380
YoY
-6.4%
31.6%
-3.0%
-2.8%
14.0%
-44.5%
-5.6%
-1.3%
10.3%
49.6%
% of total
10.7%
18.6%
13.4%
14.1%
15.6%
14.9%
13.7%
13.6%
13.6%
16.0%
Asia (excl. China, Hong Kong, Taiwan)
207
209
185
158
130
143
165
182
184
187
YoY
1.5%
7.7%
-1.1%
-1.9%
-37.2%
-31.6%
-10.8%
15.2%
41.5%
30.8%
% of total
8.4%
8.5%
7.7%
7.2%
6.7%
8.4%
7.5%
8.0%
7.5%
7.9%
EU
174
135
175
161
125
121
171
154
165
156
YoY
-4.4%
-4.9%
-21.9%
5.2%
-28.2%
-10.4%
-2.3%
-4.3%
32.0%
28.9%
% of total
7.1%
5.5%
7.3%
7.3%
6.5%
7.1%
7.8%
6.8%
6.7%
6.6%
US, other
36
41
38
35
33
29
37
40
55
48
YoY
-23.4%
7.9%
-17.4%
9.4%
-8.3%
-29.3%
-2.6%
14.3%
66.7%
65.5%
% of total
1.5%
1.7%
1.6%
1.6%
1.7%
1.7%
1.7%
1.8%
2.2%
2.0%
Source: Shared Research based on company data
Sales by product
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Sales
2,466
2,466
2,390
2,209
1,935
1,701
2,200
2,265
2,445
2,376
YoY
-8.2%
-3.7%
-12.5%
-11.6%
-21.6%
-31.0%
-8.0%
2.5%
26.4%
39.6%
End mills (up to 6mm)
1,835
1,908
1,868
1,698
1,492
1,328
1,742
1,776
1,925
1,851
YoY
-9.7%
0.3%
-7.9%
-9.0%
-18.7%
-30.4%
-6.7%
4.6%
29.0%
39.4%
% of total
74.4%
77.4%
78.2%
76.9%
77.1%
78.1%
79.2%
78.4%
78.7%
77.9%
End mills (over 6mm)
256
233
227
227
177
154
199
209
217
235
YoY
-12.0%
-20.5%
-27.2%
-11.0%
-30.9%
-33.9%
-12.3%
-7.9%
22.6%
52.6%
% of total
10.4%
9.4%
9.5%
10.3%
9.1%
9.1%
9.0%
9.2%
8.9%
9.9%
End mills (other)
186
160
137
130
140
102
123
113
126
123
YoY
21.6%
-10.6%
-27.5%
-25.3%
-24.7%
-36.3%
-10.2%
-13.1%
-10.0%
20.6%
% of total
7.5%
6.5%
5.7%
5.9%
7.2%
6.0%
5.6%
5.0%
5.2%
5.2%
Other products
188
162
156
152
123
116
134
170
176
165
YoY
-9.2%
-12.0%
-21.2%
-24.8%
-34.6%
-28.4%
-14.1%
11.8%
43.1%
42.2%
% of total
7.6%
6.6%
6.5%
6.9%
6.4%
6.8%
6.1%
7.5%
7.2%
6.9%
Source: Shared Research based on company data
SG&A breakdown
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
SG&A expenses
715
792
694
804
637
694
625
668
679
718
YoY
-10.7%
4.4%
-12.1%
14.7%
-10.9%
-12.4%
-9.9%
-16.9%
6.6%
3.4%
SG&A ratio
29.0%
32.1%
29.0%
36.4%
32.9%
40.8%
28.4%
29.5%
27.8%
30.2%
Personnel expenses
377
441
364
379
329
432
358
402
392
461
YoY
-4.3%
0.2%
-4.0%
-0.3%
-12.7%
-2.0%
-1.6%
6.1%
19.1%
6.7%
Cost ratio
15.3%
17.9%
15.2%
17.2%
17.0%
25.4%
16.3%
17.8%
16.0%
19.4%
Other expenses
337
350
329
424
307
261
266
269
286
256
YoY
-16.8%
10.1%
-19.8%
32.5%
-8.9%
-25.4%
-19.1%
-36.6%
-6.8%
-1.9%
Cost ratio
13.7%
14.2%
13.8%
19.2%
15.9%
15.3%
12.1%
11.9%
11.7%
10.8%
Source: Shared Research based on company data
NS Tool small-diameter end mill sales and carbide end mill shipment sales value
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
NS Tool small-diameter end mill sales
1,835
1,908
1,868
1,698
1,492
1,328
1,742
1,776
1,925
1,851
YoY
-9.7%
0.3%
-7.9%
-9.0%
-18.7%
-30.4%
-6.7%
4.6%
29.0%
39.4%
Carbide end mill sales
11,850
10,939
10,809
10,243
8,631
7,730
9,198
10,226
10,746
YoY
-5.9%
-10.0%
-11.5%
-12.0%
-27.2%
-29.3%
-14.9%
-0.2%
24.5%
-
Inventories and inventory turnover days
Inventories and days in inventory
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Days in inventory
77
79
83
90
105
115
79
71
64
64
Inventories
2,083
2,175
2,162
2,201
2,266
2,025
1,776
1,759
1,646
1,704
YoY
18.0%
17.3%
12.4%
7.1%
8.8%
-6.9%
-17.9%
-20.1%
-27.4%
-15.9%
Merchandise and finished goods
1,347
1,385
1,353
1,320
1,421
1,209
1,024
1,044
995
1,072
YoY
16.6%
16.8%
11.4%
3.9%
5.5%
-12.7%
-24.3%
-20.9%
-29.9%
-11.3%
Work in process
243
247
208
274
212
223
288
333
285
291
YoY
-1.3%
-9.4%
-25.2%
-13.9%
-12.7%
-9.7%
38.4%
21.5%
34.5%
30.4%
Raw materials and supplies
493
544
601
607
633
594
464
381
365
341
YoY
35.5%
37.3%
39.3%
30.1%
28.3%
9.2%
-22.8%
-37.1%
-42.4%
-42.6%
Sales
2,466
2,466
2,390
2,209
1,935
1,701
2,200
2,265
2,445
2,376
YoY
-8.2%
-3.7%
-12.5%
-11.6%
-21.6%
-31.0%
-8.0%
2.5%
26.4%
39.6%
1H FY03/22 results (out October 29, 2021)
1H FY03/22 results (April–September)
1H results (April–September) were as follows.
Sales: JPY4.8bn (+32.6% YoY; vs. 1H company forecast of JPY4.7bn)
Net income attributable to the parent company: JPY771mn (2.8x times; JPY670mn)
The 1H forecast was revised upward at the time of the Q1 results announcement. The company plans to pay an interim dividend of JPY10/share.
In 1H, sales of mainstay automotive-related products were affected by production cutbacks due to a shortage of semiconductors from late-August onwards. By product, sales increased YoY in all product categories, including the company's mainstay end mills (6 mm or less). Mass-production benefits improved gross profit margins and helped to offset increases in labor and other costs, resulting in a nearly threefold increase in operating profit. Sales and operating profit exceeded the company's 1H forecast, which was upgraded at the time of the Q1 results announcement, by about 4% and 13%, respectively.
Operating profit increased by about JPY710mn YoY (from JPY404mn in 1H FY03/21 to JPY1.1bn in 1H FY03/22) due to: 1) a JPY815mn increase in profit from higher domestic sales; 2) a JPY369mn increase in profit from higher overseas sales; 3) a JPY409mn increase in cost of sales due to higher sales; and 4) a JPY65 mn increase in SG&A expenses, including labor and operating expenses. While labor expenses increased, the increase in SG&A spending was kept to a minimum due to continued careful control of operating expenses and expenses recorded in the previous year dropping out.
The operating profit margin increased by 12pp from 11.1% in 1H FY03/21 to 23.1% in 1H FY03/22. It should be noted that the profit margin was lower than usual in 1H FY03/21 due to the severe impact of the pandemic (historically, the 1H margin has tended to be 22–28%). Notwithstanding this, profit margins are returning to normal, primarily reflecting the benefits of improved gross margins as a result of increased production. On the other hand, margins are still below the 25.6% achieved in 1H of year before last (April–September 2019) and 27.9% in 1H three years ago (April–September 2018). This primarily reflects the impact of reductions in automobile production. Shared Research believes there still remains room for improvement in profit margins going forward.
Q2 results (July–September)
Results for Q2 (July–September) were as follows.
Sales: JPY2.4bn (+39.6% YoY)
Operating profit: JPY532mn (10.2x YoY)
Recurring profit: JPY541mn (6.0x YoY)
Net income attributable to the parent company: JPY379mn (8.9x YoY)
Sales and profits rose YoY continuously from Q1 (April–June 2021). The significant YoY increase reflects the fact that the Q2 FY03/21 comparative (July–September 2020) was severely impacted by COVID-19.
On the other hand, compared to the previous quarter, sales and profits declined. Q2 results are seasonally lower than Q1 as the company has fewer operating days in Q2 due to summer holidays. Therefore, the decline in sales (Q1 JPY2.4bn; Q2 JPY2.3bn) and operating profit (Q1 JPY582mn; Q2 JPY532mn) is not a cause for concern. Shared Research believes that Q2 results were stronger than the numbers suggest, since auto manufacturers started to adjust their production schedules in late August, which had a considerable impact on the company's sales.
The operating profit margin in Q2 was 22.4%, a significant recovery from 3.1% a year earlier, but down 1.4pp from the Q1 margin (23.8%) due to an increase in labor and other SG&A expenses.
On a quarterly basis, sales and operating profit have grown YoY for three consecutive quarters, and recurring profit and net income for four.
Trends in tungsten prices
Source: Shared Research based on Bloomberg data
Company forecast for FY03/22
FY03/20
FY03/21
FY03/22
(JPYmn)
1H
2H
FY
1H
2H
FY
1H Act.
2H Est.
FY Est.
Sales
4,932
4,599
9,531
3,636
4,464
8,100
4,821
4,349
9,170
YoY
-6.0%
-12.1%
-9.0%
-26.3%
-2.9%
-15.0%
32.6%
-2.6%
13.2%
Japan
3,403
3,212
6,615
2,494
3,111
5,605
3,310
-
-
YoY
-10.5%
-14.9%
-12.7%
-26.7%
-3.1%
-15.3%
32.7%
-
-
Overseas
1,527
1,389
2,916
1,140
1,355
2,495
1,509
-
-
YoY
6.0%
-4.7%
0.6%
-25.3%
-2.4%
-14.4%
32.4%
-
-
Gross profit
2,770
2,454
5,224
1,735
2,402
4,138
2,511
-
-
YoY
-8.3%
-15.6%
-11.9%
-37.4%
-2.1%
-20.8%
44.7%
-
-
Gross profit margin
56.2%
53.4%
54.8%
47.7%
53.8%
51.1%
52.1%
-
-
SG&A expenses
1,507
1,498
3,005
1,331
1,293
2,625
1,397
-
-
YoY
-3.3%
0.5%
-1.5%
-11.7%
-13.7%
-12.7%
4.9%
-
-
SG&A ratio
30.6%
32.6%
31.5%
36.6%
29.0%
32.4%
29.0%
-
-
Operating profit
1,263
956
2,219
404
1,109
1,513
1,114
806
1,920
YoY
-13.6%
-32.6%
-22.9%
-68.0%
16.0%
-31.8%
175.7%
-27.3%
26.9%
Operating profit margin
25.6%
20.8%
23.3%
11.1%
24.8%
18.7%
23.1%
18.5%
20.9%
Recurring profit
1,265
966
2,232
444
1,268
1,712
1,131
799
1,930
YoY
-13.8%
-32.3%
-22.9%
-64.9%
31.3%
-23.3%
154.6%
-37.0%
12.7%
Recurring profit margin
25.7%
21.0%
23.4%
12.2%
28.4%
21.1%
23.5%
18.4%
21.0%
Net income
833
713
1,546
275
939
1,214
771
559
1,330
YoY
-14.4%
-28.5%
-21.6%
-67.0%
31.7%
-21.4%
180.2%
-40.5%
9.5%
Net margin
16.9%
15.5%
16.2%
7.6%
21.0%
15.0%
16.0%
12.9%
14.5%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Summary of forecast
At the time of the Q2 results announcement, the company maintained its full-year FY03/22 forecast (which was revised upwards when it announced Q1 results) and dividend forecast. The company's current forecasts are as follows.
Net sales: JPY9.2bn (+13.2% YoY)
Operating profit: JPY1.9bn (+26.9% YoY)
Recurring profit: JPY1.9bn (+12.7% YoY)
Net income: JPY1.3bn (+9.5% YoY)
Forecast EPS is JPY53.1. The company plans to pay a year-end dividend of JPY10 per share (the previous forecast was also JPY10/share), bringing the annual dividend to JPY20/share (previous forecast was JPY20 per share).
The company left its full-year forecasts unchanged reflecting the following factors: 1) continued impact of the pandemic in Q3 and beyond 2) the impact of semiconductor and component shortages on overall production activities and 3) price competition in certain product areas. Shared Research assumes the company has taken these risk factors into account in maintaining its forecast.
The company's principal concern is the stagnation of production activities due to the shortage of parts and materials (stemming from lockdowns in the Asian region and soaring raw material prices). Since late August, automakers have made large-scale production cuts in Japan and overseas, and one of the biggest factors behind this has been delays to the procurement of parts in Southeast Asia, caused by restrictions on the operation of plants due to the pandemic. The company is concerned about further impacts from these risk factors in 2H.
On the other hand, the company expects demand itself to remain strong, especially in the semiconductor industry. In the automotive sector, production cutbacks are solely due to a shortage of parts and materials, and demand has not declined. There are many companies, including NS Tool, who believe that production activity will rapidly resume once bottleneck factors, including parts shortages, are resolved. However, the outlook for the timing of such a recovery remains unclear.
It is difficult for the company to make production plans until the production outlook in the automotive and other sectors becomes clearer. That said, the company says its inventory levels have returned to normal and it is ready to increase production. Depending on the business environment, the company may revise its full-year forecast when it announces Q3 results.
Factors affecting operating profit
The company forecast calls for growth in operating profit for the first time in three years. Although it has not announced a detailed breakdown of its estimates by factor, the rise in profits will mainly come from sales growth. Cost of sales and SG&A expenses will increase in line with sales growth, but the company expects to be able to absorb these increases. The increase in cost of sales appears to be due to higher raw material costs and subcontracted processing costs associated with increased production, while the increase in SG&A expenses is likely to be driven by higher sales activity expenses, such as travel expenses associated with the resumption of exhibitions. In terms of the increase in cost of sales, the company expects that the cost reduction benefits of higher production will outweigh concerns over rising raw material costs from Q3 onward. The company also expects productivity improvements to contribute to improvement in gross profit margins.
Domestic and oveseas sales forecast
The company has not announced its forecast for domestic and overseas sales, but it seems to be expecting the overseas sales ratio of around 30% (30.8% in FY03/21). In Q1 (April–June), the overseas sales ratio was 30.1%, which was in line with the company's expectations; in Q2 (July–September), the ratio rose to 32.5%. This was due to a steady recovery in sales in Greater China (China, Hong Kong, and Taiwan; Q2 sales +49.6% YoY), as well as a slight slowdown in domestic sales in Q2 due to adjustments in automobile production. In terms of overseas sales, Asia ex-Greater China also performed well, with Q2 sales of JPY772mn (+40.6% YoY), the highest level for two years, close to the JPY844mn level of July–September 2019. Overseas sales are now ahead of where they were pre-COVID, but by region, Europe and the US are still in recovery mode; the impact of the decline in automobile production in Europe began to appear in Q2.
Sales forecast by product
The company expects sales by product to be in essentially the same ratios as in FY03/21 (78.2% for end mills up to 6mm). However, in Q1 (April–June), mainstay end mills (up to 6mm) grew faster than other end mills (over 6mm), with a gradual shift in the product mix ratio in favor of end mills up to 6mm (78.7% in Q1). However, in Q2 (July–September), the sales ratio of end mills up to 6mm dropped again to 77.9%. The company believes this was due to the decline in automobile production since late August. Recovery prospects in automobile production remain unclear, and the company believes it is necessary to look ahead to Q3 (October–December) and beyond for improvement.
Capex forecast
The company forecasts capex at JPY589mn (+27.4% YoY) and depreciation at JPY713mn (+0.8% YoY). This forecast is unchanged as of the Q1 FY03/22 results announcement. Capex will include carryover from FY03/21, which implies that the company plans for the actual level of new capex to be lower than the typical level (around JPY500–600mn). This is thought to be due to the fact that the company had already completed major investment projects by the end of FY03/20, and also due to a focus on overall efficiency. However, there is the possibility of capex plan to be revised in the future depending on sales trends. Depreciation expenses are expected to reach a record high level, despite a marginal increase on a YoY basis. Although the increase in depreciation is a negative factor for operating profit, this is more than offset by the benefits of higher gross profit due to increased production and has been factored into the company's forecast.
Historical forecast accuracy
Results vs. Initial Est.
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Sales
Initial Est.
6,190
6,340
6,760
8,200
8,480
9,130
10,520
10,380
-
Results
5,998
6,419
7,403
8,382
8,826
9,767
10,476
9,531
8,100
Results vs. Initial Est.
-3.1%
1.2%
9.5%
2.2%
4.1%
7.0%
-0.4%
-8.2%
-
Operating profit
Initial Est.
1,020
1,000
1,130
1,630
1,940
2,090
2,750
2,440
-
Results
922
1,069
1,481
1,914
2,013
2,696
2,880
2,219
1,513
Results vs. Initial Est.
-9.6%
6.9%
31.1%
17.4%
3.8%
29.0%
4.7%
-9.1%
-
Recurring profit
Initial Est.
1,050
1,020
1,160
1,660
1,980
2,100
2,780
2,460
-
Results
952
1,107
1,534
1,955
2,026
2,734
2,895
2,232
1,712
Results vs. Initial Est.
-9.4%
8.5%
32.3%
17.8%
2.3%
30.2%
4.1%
-9.3%
-
Net income
Initial Est.
600
620
715
1,100
1,350
1,450
1,910
1,960
-
Results
527
695
973
1,343
1,421
1,903
1,970
1,546
1,214
Results vs. Initial Est.
-12.1%
12.0%
36.1%
22.1%
5.2%
31.3%
3.2%
-21.1%
-
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Management targets
The company does not release medium-term plans. NS Tool’s management emphasizes profitability over sales, and it has established 20% as its recurring profit margin (RPM) target over the medium- to long-term. In FY03/15, NS Tool’s RPM rebounded above 20% and has stayed above that level for the following six fiscal years. RPM deteriorated for the second consecutive year in FY03/21 due to the substantial impact of the COVID-19 pandemic. Nevertheless, it still came in at 21.1%, suggesting that the company can now expect RPMs north of 20% as a matter of course. The company has secured this high margin by focusing on the niche market of small-diameter end mills, differentiating its products (securing technological capabilities that enable it to avoid price competition) and creating a cost structure that is not dependent on personnel expense levels by promoting automation of its production lines. NS Tool also considers an ROE of 10% as another key management indicator. In FY03/15, its ROE recovered to 10% and stayed above that level for the following five fiscal years through FY03/20. In FY03/21, however, it dipped to 8.1%, falling below 10% for the first time in six fiscal years. While a complete end to the COVID-19 pandemic is not yet in sight, whether or not the company will be able to quickly recover an ROE of 10% or greater warrants attention.
Other key earnings performance indicators for NS Tool’s management include a 40% share of the domestic market for carbide small-diameter end mills and an overseas sales ratio of 30%.
Aiming for dominance in the domestic market for precision processing tools, with a focus on domestic carbide small-diameter end mills
The company puts the size of the domestic market for carbide small-diameter end mills at some JPY19–20bn as of May 2020, compared with only about JPY10bn back in 2010. The company sees a number of factors driving growth in the market over these past years, including the increasing digitalization of home appliances, the spread of smartphones, and in the automotive sector the increasing use of electronics and the installation of advanced driver assistance systems, all of which increased the need for precision machining. Growth at NS Tool was further aided by the company’s decision to focus resources on small-diameter end mills, which allowed it to increase its share of this growing market.
Looking ahead, in the medium term, the company sees demand continuing to grow for small-diameter end mills, which will be essential for the precision processing needed for all the new products that are coming down the line with advances in telecommunications equipment, including the rollout of next-generation mobile phones and IoT-linked devices, as well as growing demand from the automotive sector as cars are making increasing use of self-steering technology. On the minus side, the company believes that it will be difficult to increase its share of the domestic market much further. To sustain growth, then, in addition to trying to expand its domestic market share it will also be important to increase its market share overseas.
Sales by region
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Sales
5,998
6,419
7,403
8,382
8,826
9,767
10,476
9,531
8,100
YoY
3.7%
7.0%
15.3%
13.2%
5.3%
10.7%
7.3%
-9.0%
-15.0%
Domestic sales
4,750
5,150
5,699
6,437
6,658
7,214
7,578
6,615
5,605
YoY
1.7%
8.4%
10.7%
12.9%
3.4%
8.4%
5.0%
-12.7%
-15.3%
% of total
79.2%
80.2%
77.0%
76.8%
75.4%
73.9%
72.3%
69.4%
69.2%
Overseas sales
1,247
1,268
1,703
1,944
2,167
2,553
2,898
2,916
2,495
YoY
12.5%
1.7%
34.3%
14.2%
11.5%
17.8%
13.5%
0.6%
-14.4%
% of total
20.8%
19.8%
23.0%
23.2%
24.6%
26.1%
27.7%
30.6%
30.8%
NS Tool aims to become the dominant company in the field of precision machining tools, with a focus on carbide small-diameter end mills. To achieve that goal, the company is expanding its business domain through a companywide effort, including the development, production, and sales divisions.
The development division is proposing new processes based on direct feedback from users obtained during technical workshops and seminars. This direct input from users better enables development team members to grasp the changing needs and increasing sophistication of users, which it then uses to develop new products and improve existing ones. The company’s development team is also actively engaged in collaborative development efforts with university research institutes and other manufacturers of equipment with strong connections to cutting tools, such as machine tools and peripheral equipment. The company believes these collaborative efforts will enable it to propose new processing methods that exceed conventional processing technology. One focus of the company’s product development is to expand the areas where CBN (cubic born nitride) end mills are used. The usefulness of CBN tools has gained wider recognition in recent years, and NS Tool plans to introduce more of this type of end mill. PCD (polycrystalline diamond) end mills still have limited applications, but NS Tool is working to improve product performance and user awareness. It also plans to begin marketing trial kits.
The production division is using self-developed equipment to strengthen its automated production lines and expand the use automation into new areas. To date, the company has aggressively introduced automated lines. The company intends to continue promoting unmanned and labor-saving production lines, as it further strengthens its ability to provide a stable supply of high-quality, cost-competitive products. The production division is also stepping up its efforts related to high-mix, small-batch production and quick delivery, as it strives to build a system that can meet the needs of various users.
Meanwhile, the sales department is increasing staffing in its marketing unit and strengthening its sales technology and sales planning units. The plan is to improve elements of the company’s marketing, including the technical capabilities and sales pitch skills of its marketing staff.
Achieving overseas sales ratio of 30%
The proportion of overall sales accounted for by overseas sales had been hovering around 20% up until FY03/14. NS Tool has been endeavoring to raise overseas awareness of the company and its products through various activities, starting with strengthening its Hong Kong sales subsidiary; participating in overseas exhibitions, such as the International Manufacturing Technology Show (IMTS) in the United States and the EMO machine tool exhibition in Europe; and displaying its products at private exhibitions. Meanwhile, demand for small-diameter end mills has been expanding overseas at a faster pace than in Japan due to structural changes in the global supply chain, such as expansion of smartphone production in China and other countries. Until FY03/19, the company’s overseas sales ratio increased because its overseas sales grew at a faster pace than still-growing domestic sales. Since then, overseas sales have remained relatively strong, and the overseas sales ratio exceeded 30% in FY03/20 and FY03/21. However, it is clear that the marked decline in domestic sales was a contributing factor, and whether the overseas sales ratio will remain reliably above 30% after domestic sales recover is still an open question.
There are a number of factors that can be credited for the company’s high share of the domestic Japanese market, including its expansive sales network consisting of sales agencies and many small and medium-sized tool distributors. In contrast, NS Tool has relatively little name recognition overseas and a sales network that is far from sufficient. As this leaves plenty of room for the company to expand overseas, we will monitor any new overseas sales ratio targets set by the company’s management.
Shared Research believes it is extremely important for the company’s management to maintain the numerical values it has set as management targets. However, now that many of the original target values have been achieved, it is time to set new goals that will drive management and the company to strive for further growth.
Business
According to the Ministry of Economy, Trade and Industry, the machine tool market in 2020 was worth JPY366.5bn (-24% YoY). Within the machine tool market, the carbide tool market was worth JPY228.6bn (-23% YoY). Within the carbide tool market, the carbide end mill market was worth JPY40.4bn (-26% YoY), within which NS Tool puts the value of the small-diameter end mill market at roughly JPY20.0bn (+13% YoY). NS Tool specializes in the manufacture and sale of small-diameter carbide end mills, and its goal is to become the dominant company in that niche market.
In the tools industry, the company does not aim to increase market share through the production of generic tools, but instead looks to the high value-added micro and precision machining market as its target audience (market size about JPY20.0bn). NS Tool has grown riding the secular trend of product miniaturization.
The following three points make NS Tool unique:
Specializes in the manufacture and sale of carbide end mills, with small-diameter products responsible for over 75% of its sales. The company has the top share in the domestic small-diameter carbide end mill market.
Places great value on manufacturing products in Japan. The company has been pursuing maximum efficiency of production and development, consolidating the facilities at a single plant in Sendai (Miyagi prefecture)
Boasts strong financials (net cash positive, high equity ratio). The company has maintained double-digit ROE since FY03/15
Main business segments
The company reports in two segments, the End Mills and the Other Products. Previously, the End Mills was the only segment but on April 1, 2011 Makino Industry, a manufacturer of tool cases and other plastic parts, became a consolidated subsidiary forming the Other Products segment.
NS Tool discloses a breakdown of sales figures by end mill size in the End Mills segment. As shown below, small-diameter end mills with a diameter of 6mm or less account for over 75% of total sales. This is a key factor in the company’s high profitability. Note, the Other Products segment refers to sales from Makino Industry.
Sales by product
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Sales
5,998
6,419
7,403
8,382
8,826
9,767
10,476
9,531
8,100
YoY
3.7%
7.0%
15.3%
13.2%
5.3%
10.7%
7.3%
-9.0%
-15.0%
End mills (up to 6mm)
4,193
4,570
5,301
5,931
6,377
7,390
7,832
7,310
6,338
YoY
4.5%
9.0%
16.0%
11.9%
7.5%
15.9%
6.0%
-6.7%
-13.3%
% of total
69.9%
71.2%
71.6%
70.8%
72.3%
75.7%
74.8%
76.7%
78.2%
End mills (over 6mm)
738
825
925
971
1,033
1,095
1,152
945
739
YoY
-1.6%
11.8%
12.1%
5.0%
6.4%
6.0%
5.2%
-18.0%
-21.8%
% of total
12.3%
12.9%
12.5%
11.6%
11.7%
11.2%
11.0%
9.9%
9.1%
End mills (other)
646
586
661
805
788
577
697
614
478
YoY
11.6%
-9.3%
12.8%
21.8%
-2.1%
-26.8%
20.8%
-11.9%
-22.1%
% of total
10.8%
9.1%
8.9%
9.6%
8.9%
5.9%
6.7%
6.4%
5.9%
Other products
419
435
514
673
626
704
793
660
543
YoY
-4.8%
3.8%
18.2%
30.9%
-7.0%
12.5%
12.6%
-16.8%
-17.7%
% of total
7.0%
6.8%
6.9%
8.0%
7.1%
7.2%
7.6%
6.9%
6.7%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
End mills
The company’s main segment involves the manufacture and sale of cutting tools, particularly carbide small-diameter end mills.
What are small-diameter end mills?
Small-diameter end mills are end mills that are small in diameter, and constructed of some of the hardest metals available. Such end mills are used primarily in machining of precision metals and equipment.
Source: Shared Research based on company materials
End mills
End mills are cutting tools that are installed in a machine tool or machining center (milling machine) and when rotated can generally cut in all directions. The Japanese Industrial Standards (JIS) defined end mills as “the generic name for a shank-type cutter with a blade on the outer side and edge side.”
Similar in appearance to the end mills, drills are also rotated on axis but are only used to create a circular hole. In contrast, end mills have a cutting blade in both the horizontal direction (at the end point) and the vertical direction (on both sides). Therefore, it is able to cut a variety of shapes, such as holes, grooves, planes, and three-dimensional curved surfaces and can be used to produce goods with a high degree of surface precision. End mills are used for cutting materials used in molds (steel materials, stainless steel, aluminum, etc.) or parts (resins, etc.), as well as for grinding and polishing.
Specialization in carbide end mills
NS Tool specializes in carbide end mills, a generic name for end mills made from carbide alloys created by high-temperature sintering of powder raw materials, primarily tungsten and cobalt.
About carbide alloys
As a historical side note, the manufacturing method for carbide alloys was developed in 1923 by the German scientist, Schroetar. The first carbide alloys in Japan were developed by Shibaura Engineering Works Co., Ltd., a predecessor of Toshiba Corporation (TSE2: 6502), and Tokyo Electric Company, and marketed as Tungaloy from 1930. Shortly afterward, Sumitomo Densen Seizojo (currently Sumitomo Electric Industries; TSE1: 5802) developed Igetalloy, while Mitsubishi Mining Co. Ltd. (currently Mitsubishi Materials Corporation; TSE1: 5711) developed Diatitanit. Together, these three alloys are known as the “big three” of carbide alloys.
Base metal for cutting tools
The main parent materials for cutting tools include high-speed steel (HSS), carbide alloys, diamonds, and CBN. The characteristics required of a parent metal include abrasion resistance (hardness), heat resistance, defect resistance (toughness and durability), chemical stability, and thermal conductivity. Within these characteristics, the most fundamental requirements for a parent metal are that it is abrasion and defect resistant.
Rigidity, temperature resistance, and chemical stability are required
Generally, the cutting material must be three to four times harder than the work material. However, at the same time it must be defect resistant to withstand the momentary but forceful impacts. Moreover, high levels of heat and pressure are generated at the cutting point (the point where the cutting tool touches the work material). Consequently, the material must be heat resistant (meaning its hardness does not deteriorate even at high temperatures). High pressures are also generated at the cutting point; therefore, ideally the material should be chemically stable as chemical reactions are prone to occur in this type of environment.
However, some of these characteristics are contradictory and no perfect material exists that possesses all of them. For example, diamond is extremely abrasion resistant, but its defect resistance is poor. Conversely, HSS has excellent defect resistance but a low level of abrasion resistance. Carbide alloys are positioned somewhere between diamonds and HSS, although their characteristics are slightly more similar to those of HSS.
Characteristics of various cutting tools and their parent materials
Source: Shared Research based on company data
Parent material has shifted from HSS to carbide
Carbide end mills possess superior abrasion resistance compared to HSS end mills and are used for high-speed processing of materials that are difficult to cut. In addition, compared to HSS they can substantially reduce the processing costs as they can be used for high-speed processing and thereby reduce the time required for this processing. In conjunction with the continuing miniaturization of the end product, materials that are difficult to cut are increasingly being used and there has been a shift from HSS to carbide for the parent material used in cutting tools.
Carbide tool market and special steel cutting tool market
Production value by tool
CY2010
CY2011
CY2012
CY2013
CY2014
CY2015
CY2016
CY2017
CY2018
CY2019
CY2020
(JPYmn)
Total machine tools
380,647
411,466
406,511
382,830
437,410
465,281
446,184
464,011
502,587
478,862
366,546
YoY
54.1%
8.1%
-1.2%
-5.8%
14.3%
6.4%
-4.1%
4.0%
8.3%
-4.7%
-23.5%
Carbide tools
220,201
234,305
236,543
221,543
257,670
278,055
268,790
281,762
312,297
297,508
228,609
YoY
53.6%
6.4%
1.0%
-6.3%
16.3%
7.9%
-3.3%
4.8%
10.8%
-4.7%
-23.2%
% of total
57.8%
56.9%
58.2%
57.9%
58.9%
59.8%
60.2%
60.7%
62.1%
62.1%
62.4%
C (W) BN tools
21,272
22,101
21,929
21,217
24,131
25,310
24,201
26,510
29,897
26,326
20,115
YoY
76.4%
3.9%
-0.8%
-3.2%
13.7%
4.9%
-4.4%
9.5%
12.8%
-11.9%
-23.6%
% of total
5.6%
5.4%
5.4%
5.5%
5.5%
5.4%
5.4%
5.7%
5.9%
5.5%
5.5%
Diamond tools
67,836
69,499
62,928
61,547
69,465
70,376
66,763
69,356
69,540
62,816
53,089
YoY
53.0%
2.5%
-9.5%
-2.2%
12.9%
1.3%
-5.1%
3.9%
0.3%
-9.7%
-15.5%
% of total
17.8%
16.9%
15.5%
16.1%
15.9%
15.1%
15.0%
14.9%
13.8%
13.1%
14.5%
Special-steel cutting tools
71,338
85,561
85,111
78,524
86,144
91,541
86,431
86,382
90,853
92,212
92,213
YoY
51.1%
19.9%
-0.5%
-7.7%
9.7%
6.3%
-5.6%
-0.1%
5.2%
1.5%
0.0%
% of total
18.7%
20.8%
20.9%
20.5%
19.7%
19.7%
19.4%
18.6%
18.1%
19.3%
25.2%
Source: Shared Research based on Machinery Statistics from Ministry of Economy, Trade and Industry
Specialization in carbide small-diameter end mills
NS Tool has focused its efforts into end mills with a smaller diameter (according to the company’s definition, a blade-tip diameter of 6mm or less) than conventional end mills and these carbide small-diameter end mills provide more than 70% of its sales. On the other hand, end mills with a blade tip exceeding 6mm are called “large diameter” by the company and they provide roughly 10% of its sales.
Executive summary
Business
NS Tool specializes in manufacture and sale of carbide end mills, dominating the small-diameter segment of the market for these ultra-hard cutting tools with a market share of more than 75% for end mills with blade-tip diameters of 6mm or less. As demand for precision processing of components has grown along with the electrification of home appliances, the spread of smartphones and other mobile devices, and the increasing use of electronics and preventive safety technologies in cars, so too has demand for the small-diameter end mills that are used in the processing of molds and components. In addition to expanding its share of the growing domestic market for small-diameter end mills, NS Tool has also grown its business by building its presence overseas.
All of the products manufactured by NS Tool are made in Japan, as the company has concentrated its production base entirely in Japan, even going so far as to develop its own production equipment. By developing its own production equipment and systems, the company has built up expertise in factory automation and labor-saving layouts while at the same time reducing the cost of its investments in plant and equipment. With increasing factory automation, the company is able to increase employee productivity, and by concentrating production it is able to maximize the benefits of mass production. Its advanced expertise in production management allows NS Tool to consistently supply high-quality products to its customers, further increasing its competitive edge. Operating profit margin came to 18.7% in FY03/21.
Looking ahead, the company sees demand continuing to grow for small-diameter end mills, which will be essential for the precision processing needed for the new products coming down the line with advances in telecommunications equipment, including the rollout of next-generation mobile phones. The spread of IoT-linked equipment will also depend on devices that include ultra-high precision components and, in the automotive sector, the electrification of cars and the growing number of vehicles with self-steering technology on board is also expected to lead to more electronic parts being loaded into cars. Overseas sales rose to a record high of 30.8% in FY03/21, and the company is looking to further increase sales outside Japan by steadily increasing its brand recognition and building up its overseas sales and customer support network.
Trends and outlook
FY03/21: For FY03/21, sales were JPY8.1bn (-15.0% YoY), operating profit was JPY1.5bn (-31.8% YoY) and net income was JPY1.2bn (-21.4% YoY). Although this was ahead of the company’s forecasts (operating profit JPY1.5bn and net income of JPY1.1bn), this was the second consecutive year of significant declines. Although sales picked up toward the end of the year, this could not offset the impact of the decrease in domestic automobile production in 1H and the impact of inventory reductions of company products at the distribution level. There is no change in the dividend forecast for the second half (JPY25.0/share), and the full year dividend is expected to be JPY35.0/ share (JPY45.0/share in the previous year). Although the company was forced to lower its full year dividend after cutting its dividend reduction in 1H, the payout ratio remained at 36.0% (36.4% in the previous year).
FY03/22 forecast: The current forecast calls for sales of JPY9.2bn (+13.2% YoY), operating profit of JPY1.9bn (+26.9% YoY), recurring profit of JPY1.9bn (+12.7% YoY), net income of JPY1.3bn (+9.5% YoY), and EPS of JPY53.1. The company left its previous forecast unchanged at the time of the Q2 results announcement, taking account of various risk factors. The full year dividend forecast is JPY20.0/share, but this reflects the 2-for-1 stock split implemented on April 1, 2021, so on a pre-split basis, the dividend forecast would be JPY40.0/share.
Strengths and weaknesses
Shared Research thinks NS Tool’s strength lies in its focus on the core area of expertise, growing end markets, and its strong production technologies; its weaknesses include multiple-product, small-lot production, its dependence on outside distributors, and its need for a steady supply of scarce metals. (For further details, see the Strengths and weaknesses section.)
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: On October 1, 2012, on October 1, 2014, on January 1, 2017, and on April 1, 2021, the company implemented a 2-for-1 stock split (the per share data above has been adjusted retroactively).
Trends and outlook
Quarterly trends and results
1H FY03/22 results (out October 29, 2021)
1H FY03/22 results (April–September)
1H results (April–September) were as follows.
The 1H forecast was revised upward at the time of the Q1 results announcement. The company plans to pay an interim dividend of JPY10/share.
In 1H, sales of mainstay automotive-related products were affected by production cutbacks due to a shortage of semiconductors from late-August onwards. By product, sales increased YoY in all product categories, including the company's mainstay end mills (6 mm or less). Mass-production benefits improved gross profit margins and helped to offset increases in labor and other costs, resulting in a nearly threefold increase in operating profit. Sales and operating profit exceeded the company's 1H forecast, which was upgraded at the time of the Q1 results announcement, by about 4% and 13%, respectively.
Operating profit increased by about JPY710mn YoY (from JPY404mn in 1H FY03/21 to JPY1.1bn in 1H FY03/22) due to: 1) a JPY815mn increase in profit from higher domestic sales; 2) a JPY369mn increase in profit from higher overseas sales; 3) a JPY409mn increase in cost of sales due to higher sales; and 4) a JPY65 mn increase in SG&A expenses, including labor and operating expenses. While labor expenses increased, the increase in SG&A spending was kept to a minimum due to continued careful control of operating expenses and expenses recorded in the previous year dropping out.
The operating profit margin increased by 12pp from 11.1% in 1H FY03/21 to 23.1% in 1H FY03/22. It should be noted that the profit margin was lower than usual in 1H FY03/21 due to the severe impact of the pandemic (historically, the 1H margin has tended to be 22–28%). Notwithstanding this, profit margins are returning to normal, primarily reflecting the benefits of improved gross margins as a result of increased production. On the other hand, margins are still below the 25.6% achieved in 1H of year before last (April–September 2019) and 27.9% in 1H three years ago (April–September 2018). This primarily reflects the impact of reductions in automobile production. Shared Research believes there still remains room for improvement in profit margins going forward.
Q2 results (July–September)
Results for Q2 (July–September) were as follows.
Sales and profits rose YoY continuously from Q1 (April–June 2021). The significant YoY increase reflects the fact that the Q2 FY03/21 comparative (July–September 2020) was severely impacted by COVID-19.
On the other hand, compared to the previous quarter, sales and profits declined. Q2 results are seasonally lower than Q1 as the company has fewer operating days in Q2 due to summer holidays. Therefore, the decline in sales (Q1 JPY2.4bn; Q2 JPY2.3bn) and operating profit (Q1 JPY582mn; Q2 JPY532mn) is not a cause for concern. Shared Research believes that Q2 results were stronger than the numbers suggest, since auto manufacturers started to adjust their production schedules in late August, which had a considerable impact on the company's sales.
The operating profit margin in Q2 was 22.4%, a significant recovery from 3.1% a year earlier, but down 1.4pp from the Q1 margin (23.8%) due to an increase in labor and other SG&A expenses.
On a quarterly basis, sales and operating profit have grown YoY for three consecutive quarters, and recurring profit and net income for four.
Company forecast for FY03/22
Note: Figures may differ from company materials due to differences in rounding methods.
Summary of forecast
At the time of the Q2 results announcement, the company maintained its full-year FY03/22 forecast (which was revised upwards when it announced Q1 results) and dividend forecast. The company's current forecasts are as follows.
Forecast EPS is JPY53.1. The company plans to pay a year-end dividend of JPY10 per share (the previous forecast was also JPY10/share), bringing the annual dividend to JPY20/share (previous forecast was JPY20 per share).
The company left its full-year forecasts unchanged reflecting the following factors: 1) continued impact of the pandemic in Q3 and beyond 2) the impact of semiconductor and component shortages on overall production activities and 3) price competition in certain product areas. Shared Research assumes the company has taken these risk factors into account in maintaining its forecast.
The company's principal concern is the stagnation of production activities due to the shortage of parts and materials (stemming from lockdowns in the Asian region and soaring raw material prices). Since late August, automakers have made large-scale production cuts in Japan and overseas, and one of the biggest factors behind this has been delays to the procurement of parts in Southeast Asia, caused by restrictions on the operation of plants due to the pandemic. The company is concerned about further impacts from these risk factors in 2H.
On the other hand, the company expects demand itself to remain strong, especially in the semiconductor industry. In the automotive sector, production cutbacks are solely due to a shortage of parts and materials, and demand has not declined. There are many companies, including NS Tool, who believe that production activity will rapidly resume once bottleneck factors, including parts shortages, are resolved. However, the outlook for the timing of such a recovery remains unclear.
It is difficult for the company to make production plans until the production outlook in the automotive and other sectors becomes clearer. That said, the company says its inventory levels have returned to normal and it is ready to increase production. Depending on the business environment, the company may revise its full-year forecast when it announces Q3 results.
Factors affecting operating profit
The company forecast calls for growth in operating profit for the first time in three years. Although it has not announced a detailed breakdown of its estimates by factor, the rise in profits will mainly come from sales growth. Cost of sales and SG&A expenses will increase in line with sales growth, but the company expects to be able to absorb these increases. The increase in cost of sales appears to be due to higher raw material costs and subcontracted processing costs associated with increased production, while the increase in SG&A expenses is likely to be driven by higher sales activity expenses, such as travel expenses associated with the resumption of exhibitions. In terms of the increase in cost of sales, the company expects that the cost reduction benefits of higher production will outweigh concerns over rising raw material costs from Q3 onward. The company also expects productivity improvements to contribute to improvement in gross profit margins.
Domestic and oveseas sales forecast
The company has not announced its forecast for domestic and overseas sales, but it seems to be expecting the overseas sales ratio of around 30% (30.8% in FY03/21). In Q1 (April–June), the overseas sales ratio was 30.1%, which was in line with the company's expectations; in Q2 (July–September), the ratio rose to 32.5%. This was due to a steady recovery in sales in Greater China (China, Hong Kong, and Taiwan; Q2 sales +49.6% YoY), as well as a slight slowdown in domestic sales in Q2 due to adjustments in automobile production. In terms of overseas sales, Asia ex-Greater China also performed well, with Q2 sales of JPY772mn (+40.6% YoY), the highest level for two years, close to the JPY844mn level of July–September 2019. Overseas sales are now ahead of where they were pre-COVID, but by region, Europe and the US are still in recovery mode; the impact of the decline in automobile production in Europe began to appear in Q2.
Sales forecast by product
The company expects sales by product to be in essentially the same ratios as in FY03/21 (78.2% for end mills up to 6mm). However, in Q1 (April–June), mainstay end mills (up to 6mm) grew faster than other end mills (over 6mm), with a gradual shift in the product mix ratio in favor of end mills up to 6mm (78.7% in Q1). However, in Q2 (July–September), the sales ratio of end mills up to 6mm dropped again to 77.9%. The company believes this was due to the decline in automobile production since late August. Recovery prospects in automobile production remain unclear, and the company believes it is necessary to look ahead to Q3 (October–December) and beyond for improvement.
Capex forecast
The company forecasts capex at JPY589mn (+27.4% YoY) and depreciation at JPY713mn (+0.8% YoY). This forecast is unchanged as of the Q1 FY03/22 results announcement. Capex will include carryover from FY03/21, which implies that the company plans for the actual level of new capex to be lower than the typical level (around JPY500–600mn). This is thought to be due to the fact that the company had already completed major investment projects by the end of FY03/20, and also due to a focus on overall efficiency. However, there is the possibility of capex plan to be revised in the future depending on sales trends. Depreciation expenses are expected to reach a record high level, despite a marginal increase on a YoY basis. Although the increase in depreciation is a negative factor for operating profit, this is more than offset by the benefits of higher gross profit due to increased production and has been factored into the company's forecast.
Historical forecast accuracy
Note: Figures may differ from company materials due to differences in rounding methods.
Management targets
The company does not release medium-term plans. NS Tool’s management emphasizes profitability over sales, and it has established 20% as its recurring profit margin (RPM) target over the medium- to long-term. In FY03/15, NS Tool’s RPM rebounded above 20% and has stayed above that level for the following six fiscal years. RPM deteriorated for the second consecutive year in FY03/21 due to the substantial impact of the COVID-19 pandemic. Nevertheless, it still came in at 21.1%, suggesting that the company can now expect RPMs north of 20% as a matter of course. The company has secured this high margin by focusing on the niche market of small-diameter end mills, differentiating its products (securing technological capabilities that enable it to avoid price competition) and creating a cost structure that is not dependent on personnel expense levels by promoting automation of its production lines. NS Tool also considers an ROE of 10% as another key management indicator. In FY03/15, its ROE recovered to 10% and stayed above that level for the following five fiscal years through FY03/20. In FY03/21, however, it dipped to 8.1%, falling below 10% for the first time in six fiscal years. While a complete end to the COVID-19 pandemic is not yet in sight, whether or not the company will be able to quickly recover an ROE of 10% or greater warrants attention.
Other key earnings performance indicators for NS Tool’s management include a 40% share of the domestic market for carbide small-diameter end mills and an overseas sales ratio of 30%.
Aiming for dominance in the domestic market for precision processing tools, with a focus on domestic carbide small-diameter end mills
The company puts the size of the domestic market for carbide small-diameter end mills at some JPY19–20bn as of May 2020, compared with only about JPY10bn back in 2010. The company sees a number of factors driving growth in the market over these past years, including the increasing digitalization of home appliances, the spread of smartphones, and in the automotive sector the increasing use of electronics and the installation of advanced driver assistance systems, all of which increased the need for precision machining. Growth at NS Tool was further aided by the company’s decision to focus resources on small-diameter end mills, which allowed it to increase its share of this growing market.
Looking ahead, in the medium term, the company sees demand continuing to grow for small-diameter end mills, which will be essential for the precision processing needed for all the new products that are coming down the line with advances in telecommunications equipment, including the rollout of next-generation mobile phones and IoT-linked devices, as well as growing demand from the automotive sector as cars are making increasing use of self-steering technology. On the minus side, the company believes that it will be difficult to increase its share of the domestic market much further. To sustain growth, then, in addition to trying to expand its domestic market share it will also be important to increase its market share overseas.
NS Tool aims to become the dominant company in the field of precision machining tools, with a focus on carbide small-diameter end mills. To achieve that goal, the company is expanding its business domain through a companywide effort, including the development, production, and sales divisions.
The development division is proposing new processes based on direct feedback from users obtained during technical workshops and seminars. This direct input from users better enables development team members to grasp the changing needs and increasing sophistication of users, which it then uses to develop new products and improve existing ones. The company’s development team is also actively engaged in collaborative development efforts with university research institutes and other manufacturers of equipment with strong connections to cutting tools, such as machine tools and peripheral equipment. The company believes these collaborative efforts will enable it to propose new processing methods that exceed conventional processing technology. One focus of the company’s product development is to expand the areas where CBN (cubic born nitride) end mills are used. The usefulness of CBN tools has gained wider recognition in recent years, and NS Tool plans to introduce more of this type of end mill. PCD (polycrystalline diamond) end mills still have limited applications, but NS Tool is working to improve product performance and user awareness. It also plans to begin marketing trial kits.
The production division is using self-developed equipment to strengthen its automated production lines and expand the use automation into new areas. To date, the company has aggressively introduced automated lines. The company intends to continue promoting unmanned and labor-saving production lines, as it further strengthens its ability to provide a stable supply of high-quality, cost-competitive products. The production division is also stepping up its efforts related to high-mix, small-batch production and quick delivery, as it strives to build a system that can meet the needs of various users.
Meanwhile, the sales department is increasing staffing in its marketing unit and strengthening its sales technology and sales planning units. The plan is to improve elements of the company’s marketing, including the technical capabilities and sales pitch skills of its marketing staff.
Achieving overseas sales ratio of 30%
The proportion of overall sales accounted for by overseas sales had been hovering around 20% up until FY03/14. NS Tool has been endeavoring to raise overseas awareness of the company and its products through various activities, starting with strengthening its Hong Kong sales subsidiary; participating in overseas exhibitions, such as the International Manufacturing Technology Show (IMTS) in the United States and the EMO machine tool exhibition in Europe; and displaying its products at private exhibitions. Meanwhile, demand for small-diameter end mills has been expanding overseas at a faster pace than in Japan due to structural changes in the global supply chain, such as expansion of smartphone production in China and other countries. Until FY03/19, the company’s overseas sales ratio increased because its overseas sales grew at a faster pace than still-growing domestic sales. Since then, overseas sales have remained relatively strong, and the overseas sales ratio exceeded 30% in FY03/20 and FY03/21. However, it is clear that the marked decline in domestic sales was a contributing factor, and whether the overseas sales ratio will remain reliably above 30% after domestic sales recover is still an open question.
There are a number of factors that can be credited for the company’s high share of the domestic Japanese market, including its expansive sales network consisting of sales agencies and many small and medium-sized tool distributors. In contrast, NS Tool has relatively little name recognition overseas and a sales network that is far from sufficient. As this leaves plenty of room for the company to expand overseas, we will monitor any new overseas sales ratio targets set by the company’s management.
Shared Research believes it is extremely important for the company’s management to maintain the numerical values it has set as management targets. However, now that many of the original target values have been achieved, it is time to set new goals that will drive management and the company to strive for further growth.
Business
According to the Ministry of Economy, Trade and Industry, the machine tool market in 2020 was worth JPY366.5bn (-24% YoY). Within the machine tool market, the carbide tool market was worth JPY228.6bn (-23% YoY). Within the carbide tool market, the carbide end mill market was worth JPY40.4bn (-26% YoY), within which NS Tool puts the value of the small-diameter end mill market at roughly JPY20.0bn (+13% YoY). NS Tool specializes in the manufacture and sale of small-diameter carbide end mills, and its goal is to become the dominant company in that niche market.
In the tools industry, the company does not aim to increase market share through the production of generic tools, but instead looks to the high value-added micro and precision machining market as its target audience (market size about JPY20.0bn). NS Tool has grown riding the secular trend of product miniaturization.
The following three points make NS Tool unique:
Specializes in the manufacture and sale of carbide end mills, with small-diameter products responsible for over 75% of its sales. The company has the top share in the domestic small-diameter carbide end mill market.
Places great value on manufacturing products in Japan. The company has been pursuing maximum efficiency of production and development, consolidating the facilities at a single plant in Sendai (Miyagi prefecture)
Boasts strong financials (net cash positive, high equity ratio). The company has maintained double-digit ROE since FY03/15
Main business segments
The company reports in two segments, the End Mills and the Other Products. Previously, the End Mills was the only segment but on April 1, 2011 Makino Industry, a manufacturer of tool cases and other plastic parts, became a consolidated subsidiary forming the Other Products segment.
NS Tool discloses a breakdown of sales figures by end mill size in the End Mills segment. As shown below, small-diameter end mills with a diameter of 6mm or less account for over 75% of total sales. This is a key factor in the company’s high profitability. Note, the Other Products segment refers to sales from Makino Industry.
Figures may differ from company materials due to differences in rounding methods.
End mills
The company’s main segment involves the manufacture and sale of cutting tools, particularly carbide small-diameter end mills.
What are small-diameter end mills?
Small-diameter end mills are end mills that are small in diameter, and constructed of some of the hardest metals available. Such end mills are used primarily in machining of precision metals and equipment.
End mills
End mills are cutting tools that are installed in a machine tool or machining center (milling machine) and when rotated can generally cut in all directions. The Japanese Industrial Standards (JIS) defined end mills as “the generic name for a shank-type cutter with a blade on the outer side and edge side.”
Similar in appearance to the end mills, drills are also rotated on axis but are only used to create a circular hole. In contrast, end mills have a cutting blade in both the horizontal direction (at the end point) and the vertical direction (on both sides). Therefore, it is able to cut a variety of shapes, such as holes, grooves, planes, and three-dimensional curved surfaces and can be used to produce goods with a high degree of surface precision. End mills are used for cutting materials used in molds (steel materials, stainless steel, aluminum, etc.) or parts (resins, etc.), as well as for grinding and polishing.
Specialization in carbide end mills
NS Tool specializes in carbide end mills, a generic name for end mills made from carbide alloys created by high-temperature sintering of powder raw materials, primarily tungsten and cobalt.
About carbide alloys
As a historical side note, the manufacturing method for carbide alloys was developed in 1923 by the German scientist, Schroetar. The first carbide alloys in Japan were developed by Shibaura Engineering Works Co., Ltd., a predecessor of Toshiba Corporation (TSE2: 6502), and Tokyo Electric Company, and marketed as Tungaloy from 1930. Shortly afterward, Sumitomo Densen Seizojo (currently Sumitomo Electric Industries; TSE1: 5802) developed Igetalloy, while Mitsubishi Mining Co. Ltd. (currently Mitsubishi Materials Corporation; TSE1: 5711) developed Diatitanit. Together, these three alloys are known as the “big three” of carbide alloys.
Base metal for cutting tools
The main parent materials for cutting tools include high-speed steel (HSS), carbide alloys, diamonds, and CBN. The characteristics required of a parent metal include abrasion resistance (hardness), heat resistance, defect resistance (toughness and durability), chemical stability, and thermal conductivity. Within these characteristics, the most fundamental requirements for a parent metal are that it is abrasion and defect resistant.
Rigidity, temperature resistance, and chemical stability are required
Generally, the cutting material must be three to four times harder than the work material. However, at the same time it must be defect resistant to withstand the momentary but forceful impacts. Moreover, high levels of heat and pressure are generated at the cutting point (the point where the cutting tool touches the work material). Consequently, the material must be heat resistant (meaning its hardness does not deteriorate even at high temperatures). High pressures are also generated at the cutting point; therefore, ideally the material should be chemically stable as chemical reactions are prone to occur in this type of environment.
However, some of these characteristics are contradictory and no perfect material exists that possesses all of them. For example, diamond is extremely abrasion resistant, but its defect resistance is poor. Conversely, HSS has excellent defect resistance but a low level of abrasion resistance. Carbide alloys are positioned somewhere between diamonds and HSS, although their characteristics are slightly more similar to those of HSS.
Parent material has shifted from HSS to carbide
Carbide end mills possess superior abrasion resistance compared to HSS end mills and are used for high-speed processing of materials that are difficult to cut. In addition, compared to HSS they can substantially reduce the processing costs as they can be used for high-speed processing and thereby reduce the time required for this processing. In conjunction with the continuing miniaturization of the end product, materials that are difficult to cut are increasingly being used and there has been a shift from HSS to carbide for the parent material used in cutting tools.
Specialization in carbide small-diameter end mills
NS Tool has focused its efforts into end mills with a smaller diameter (according to the company’s definition, a blade-tip diameter of 6mm or less) than conventional end mills and these carbide small-diameter end mills provide more than 70% of its sales. On the other hand, end mills with a blade tip exceeding 6mm are called “large diameter” by the company and they provide roughly 10% of its sales.