The paint and coatings market continues to be huge, with significant growth opportunities for Singapore tycoon Goh Cheng Liang’s family
Tokyo-listed Nippon Paint Holdings is a global leading company in paints and coatings. Japan’s oldest and largest paint company produces paints for automobiles, ships and other industrial paints, along with manufacturing fine chemicals such as finishing agents and adhesives.
Nippon Paint, under the control of Goh Cheng Liang, one of Singapore’s most low-profile but richest tycoons, segments its asset or partner companies based on geographical coverage. The largest segment is Nipsea, which covers 22 countries centred around Asia. Next is DuluxGroup, which covers the Pacific region and Europe and operates in 22 countries. This is followed by Japan Group, which covers the Japanese market, and the Americas, which mainly covers the US Southwest region through the Dunn-Edwards brand. Nippon Paint currently trades at JPY1,122 ($10.03) per share, giving it a market cap of around JPY2.6 trillion.
We believe Nippon Paint is an undervalued stock with stable growth. There are multiple reasons to support this. The first is its huge size and footprint globally, along with its paint business, which generally grows along with population and per-capita GDP growth. Chart 1 shows the price-to-value growth of the company. The chart clearly shows why it is undervalued as the weighted value growth is significantly higher than the growth of its share price for almost all periods. As long as the weighted value growth comprising revenue, earnings, operating cash flow and free cash flow in increasing order of weights is higher than its share price, the company is undervalued, and the converse applies.
Although the benchmark Nikkei 225 gained significantly over the past year, Nippon Paint’s share price growth was relatively muted due to demand concerns from China’s property slump and forecasts of falling demand from Europe. However, these headwinds are likely offset by tailwinds such as projected demand rebound in the US and Japan for automobile production and paint demand. We think that even discarding the tailwinds to the company, it is still largely undervalued due to its strategic business initiatives that add value to the business. These strategies are focused on strong medium to long-term growth through M&A by leveraging its autonomous and decentralised management. To date, all major M&A have been profitable in markets globally. Examples include DuluxGroup, Betek Boya, and PT Nipsea, which have all seen over 50% growth since their acquisition between 2019 and 2020.
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The industry opportunities and total addressable market for the company are plenty. Firstly, the paint and coatings market, from which Nippon Paint derives a majority of its revenue, has stable growth opportunities compared to the much more volatile general chemical industry. Also, due to the expansion of construction demand, there is a huge market with significant growth opportunities for this sector’s paint and coatings market. Further, for housing, paint demand is not a oneoff occurrence for new houses, but there is also a rapidly growing demand for repainting existing houses, which is an opportunity for the company.
Nippon Paint has reported consistent results, particularly its operating cash flow and free cash flow over the past 10 years, as shown in Chart 2. Financial safety-wise, the company has excellent liquidity with a current ratio of 2.0 times and decent solvency with a net debt-to-equity ratio of 26.8%. In addition, its interest cover of over 11.7 times indicates that debt is unlikely to pose solvency concerns to the company. In terms of yields, the company’s earnings, operating cash flow, free cash flow and dividend yields are 4.5%, 7.1%, 5.9% and 1.3%, respectively, which is much more attractive than the risk-free rate of 0.7%, as illustrated in Chart 3. Nippon Paint currently trades at a 7% and 25% discount for its forward EV/Revenue and forward P/B ratios respectively compared to global peers, which makes it a relatively attractive pickup.
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The company has two “buy” calls, four “hold” calls and no “sell” calls, with an average target price of around 15% above its current trading price. Based on our in-house valuations, we also believe that the company’s intrinsic value is at least over 15% above its current trading price. Nippon Paint is a great company for lower-risk investors seeking undervalued companies with stable growth.
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