Daiseki 9793
ダイセキ
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2022-05-12
2022-04-07
2022-01-21
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Summary
Environmental services company with strength in industrial waste disposal. Growing organically and through M&A. Strong balance sheet and cash flow generation.
Diversified Consumer Services
Key dates
2010-06-18
Coverage initiation
Executive summary
Business overview
Daiseki is an environmental specialist company whose main focus is industrial waste recycling. The parent company’s main business is intermediate processing of liquid wastes (waste oil, wastewater, sludge) and their separation into reusable components (such as recycled heavy oil and cement materials) that can then be resold. The company has established a recycling-centered processing system based on its proprietary technology, with a recycling rate of 88.3% in FY02/21. Subsidiaries include Daiseki Eco. Solution Co., Ltd. (TSE PRM: 1712), in which Daiseki holds a 53.9% stake at the end of Feb 2021, whose main businesses are soil decontamination and plasterboard recycling. Daiseki MCR, whose main business is refining and selling lead recovered from used batteries, and System Kikou, which provides cleanup services for large oil tanks and also does industrial piping installation/maintenance.
Of Daiseki Co.'s consolidated results for FY02/22 (sales of JPY56.9bn, operating profit of JPY12.9bn, OPM 22.8%), Daiseki Co. (JPY32.9bn, JPY9.4bn, 28.6%) accounted for 57.8%, the largest share of the company's total sales. Daiseki Eco. Solutions (JPY17.1 bn, JPY2.1bn, 12.3%) is the second largest at 30.0% of total sales. Daiseki MCR (JPY3.2bn; JPY706mn; 21.9%) and System Kikou (JPY3.6bn; JPY688mn; 19.0% YoY) accounted for 5.7% and 6.4%, respectively. Within the group, Daiseki Co. has the highest OPM, and continues to drive consolidated earnings growth.
With growing social demands for environmental protection as global interest in carbon neutrality heightens, companies are now promoting ESG management initiatives. Moreover, environmental regulations in Japan, particularly those related to the processing of industrial waste, have become increasingly stringent, and the company's clients, mainly manufacturers in Japan, have become more environmentally conscious. Daiseki Co. specializes mainly in treatment technologies for industrial waste recycling and has broad-ranging expertise as an environmental specialist. The company has increased its industrial waste treatment market share in Japan by providing safe, secure, and proper treatment of accepted industrial waste, reducing the amount of CO2 emissions, and enhancing social credibility. As a result, Daiseki Co. has expanded to a scale where it operates nationwide with 41 offices throughout the group, including six offices owned by Daiseki Co.
In June 2018, Daiseki unveiled its long-term management vision. Dubbed Vision 2030, the plan sets out specific targets that are aligned with the sustainable development goals set forth in the United Nation’s 2030 Agenda for Sustainable Development (adopted September 2015). As efforts to become carbon-neutral are being strengthened worldwide and corporate environmental management is becoming a social requirement, the company is promoting its corporate philosophy of contributing to society by creating a better environment. Under Vision 2030, the company is targeting FY02/31 sales of JPY150.0bn (roughly a 3.0x increase over FY02/18), operating profit of JPY25.0bn (roughly a 2.8x increase over FY02/18), and an ROE of 15% (versus 9.9% in FY02/18).
Earnings trends
In FY02/22, the company reported sales of JPY56.9bn (+10.4% YoY), operating profit of JPY12.9bn (+26.3% YoY), recurring profit of JPY13.1bn (+25.5%), and net income attributable to owners of the parent of JPY8.4bn (+28.4% YoY). EPS was JPY164.0, and annual dividend per share was JPY60.0 (payout ratio of 36.5%). The pace of recovery in orders for industrial waste processing slowed somewhat in 2H, but recycled fuel sales, soil contamination treatment, and lead recycling grew, leading to sales and all profit categories from the operating profit line down reaching record highs. Profitability improved owed to price revisions and other factors, with the OPM of 22.8% (+2.9pp YoY) at its second highest on record.
For FY02/23, the company forecasts sales of JPY61.0bn (+7.3% YoY), operating profit of JPY14.0bn (+8.2% YoY), recurring profit of JPY14.1bn (+7.5% YoY), net income attributable to owners of the parent of JPY8.8bn (+5.1% YoY), and EPS of JPY174.0. The company plans to pay an annual dividend of JPY60.0 per share, unchanged YoY, for an expected payout ratio of 34.4%. Daiseki (the parent) is expected to drive consolidated earnings growth with increases in orders for industrial waste processing and recycled fuel sales, and Daiseki Eco. Solution Co., Ltd.'s soil contamination treatment business is also expected to expand. The company plans to renew record sales and profits for the second year in a row on the back of profitability improvements driven by price revisions and cost cuts. OPM is forecast to reach its second highest on record at 23.0%.
The company updated its medium-term management plan in April 2022.
Having achieved the targets for FY02/23 released in April 2021 one year ahead of plan, it raised its previous targets for FY02/23 and FY02/24. Targets for the newly added FY02/25 are sales of JPY69.0bn, operating profit of JPY16.3bn, and net income attributable to owners of the parent of JPY10.2bn; the company plans an ROE of 11.3%. Sales and profits are expected to renew their respective record highs in all three years of the medium-term plan. Further, OPM target of 23.6% for FY02/25, if achieved, will be a new record high in 17 years. The company aims to expand earnings while continuing to make substantial capital investments for future growth in response to increased demand for industrial waste processing, soil contamination treatment, and its recycling business (such as fuel and lead).
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 focus on liquid waste processing. On the flip side, we also see three notable weaknesses. First, domestic industrial production holds back the company’s growth; 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.)
Key financial data
Note: The company conducted a 1:1.2 stock split effective September 1, 2021.
Trends and outlook
Monthly trends
Note: Includes gross profit on soil contamination cleanup sales to Daiseki Eco. Solution; GPM tends to decrease in months when sales are high.
Quarterly trends and results
Full-year FY02/22 results (out April 5, 2022)
Overview
Full-year FY02/22 results are as follows.
FY02/22 results were in line with the previous forecast (this plan was revised upward from the initial plan on October 1, 2021). The company's industrial waste treatment orders recovered at a slightly slower pace in 2H due to a temporary slump in the industrial production index caused by reduced automobile production and other factors. Sales of recycled fuel, soil contamination treatment, and lead recycling, however, all grew. As a result, sales and all profits, including operating profit, reached record highs for the first time in two fiscal years. Moreover, profitability improved through price revisions and cost reductions, resulting in an OPM of 22.8% (+2.9pp YoY), the second highest level on record, close to the 23.3% recorded in FY02/08. This was the result of Daiseki Co. revising its treatment prices and raising the price of recycled fuel oil, Daiseki Eco. Solutions' penetration of consulting sales, and higher lead prices at Daiseki MCR, while company-wide cost reductions also contributed to the success of the project.
The company positioned its FY02/22 performance as an escape from FY02/21, when the pandemic forced temporary stagnation. In FY02/21, sales and profits declined due to the impact of COVID-19 (production shutdowns by customers, restrictions on the company's sales activities, and lower resource prices). In FY02/22, the effects of the pandemic were not completely resolved, and the impact of automobile production cuts and other factors remained in some areas. However, the company recognizes that the resumption of sales activities, as well as price revisions and higher resource prices bolstered by an improved external environment, have put it back on the growth trajectory that began in FY02/19, and it reaffirmed that there will be no change in its growth scenario through 2030.
On September 1, 2021, the company conducted a 1.2-for-1 stock split of its common shares. Considering this stock split, the annual dividend forecast of JPY60.0 per share in essence indicates a dividend increase of JPY10.4 per share based on the number of outstanding shares in the previous year (FY02/21).
Achieved medium-term management plan approximately one year ahead of schedule
The company updates its three-year medium-term management plan every April when it announces its financial results. In the medium-term management plan announced in April 2021, the company established the following earnings plan for the period from FY02/22 through FY02/24 (only major items are shown).
In April 2021, when the company announced these targets, the effects of the re-emergence of COVID-19 had not yet subsided, and the medium-term management plan was also conservative. Although it is necessary to take such circumstances into account, as a result, all profits categories, profit margin, and ROE in FY02/22 achieved the FY02/23 plan one year ahead of schedule. On the other hand, sales were generally in line with the company's plan (no sales were brought forward one year), which means that profitability improved more than the company had expected. For the new medium-term management plan, please refer to the "Medium-term management plan" section.
Q4 FY02/22 (December 2021–February 2022)
Q4 results (December 2021–February 2022) are as follows.
Sales were up by only single digits (+4.8% YoY), but all profit categories from the operating profit line down maintained double-digit growth. OPM of 21.1% was up YoY, but was down compared to OPM in Q1 (March–May 2021) of 22.2%, in Q2 (June–August 2021) of 24.7%, and in Q3 (September–November 2021) of 22.8%. Sales increased YoY for four consecutive quarters and operating profit for five consecutive quarters.
Daiseki Co. (parent)
Summary of full-year results (12 months)
Full-year results for FY02/22 were as follows.
The previous plan was the initial plan announced in April 2021. Daiseki Co. maintained its original plan for one year.
Sales increased 6.5% YoY due to an increase in the volume of industrial waste received, price revisions, and higher prices for recycled fuel oil, but did not meet the target set in the previous plan. This was due to the decline in production activities following the state of emergency declarations, particularly the impact of reduced production of automobiles due to a shortage of components. In fact, the volume of industrial waste received remained at 1,080 thousand tons (+1.3% YoY), falling short of the 1,160 thousand tons received in FY02/20. As a result, sales increased, but did not reach the JPY33.5bn (record high) achieved in FY02/20.
Meanwhile, operating profit increased 14.5% YoY, reaching a record high for the first time in two fiscal years, and each of the company's other profit categories set new records as well, while also exceeding the previous plan. Despite the fact that sales did not reach a record high, operating profit did, due to: 1) higher profit margins from the promotion of price revisions, 2) comprehensive cost management (e.g., improved recycling rate), and 3) higher recycled fuel oil prices. These measures resulted in the operating profit margin rising 2.0pp YoY to 28.6%, setting a new record in terms of profitability.
The company recognizes that the higher profit margins resulting from price revision promotion in particular contributed to this result. The company's recycling technology is attracting renewed attention as environmental regulations are becoming increasingly stringent and more demands are being placed on general businesses regarding the handling of wastewater treatment. Given this, the company understands that the profitability improvement effect of the widely disseminated price revision was greater than anticipated. According to the company, the price revision is expected to have a sustainable effect since it will be accepted by general businesses in FY02/23 and beyond. In terms of comprehensive cost management, the company successfully curbed the outsourced processing cost ratio by improving the recycling rate, while also enhancing facility efficiency and thoroughly managing variable costs. Concerning the increase in the price of recycled heavy oil, the company expects to see a greater effect in FY02/23 because this price follows the price crude oil with a time lag of three to four months.
Summary of Q4 (December–February, 3 months) results
The results for the most recent Q4 (December 2021–February 2022, three months) were as follows.
Although sales were partially affected by the re-emergence of COVID-19—more pronounced from the beginning of January 2022—sales and profits increased due to the penetration of the effects of profitability improvement. The OPM of 27.5% was lower than the 29.5% in Q1 (March–May), 29.4% in Q2 (June–August), and 28.1% in Q3 (September–November), but represents a new record for Q4. Daiseki Co. tends to have the lowest profit margin in Q4 during the year, due to the number of operating days and effects specific to the end of the period.