´´ The Nice - Osaka Gas (JP:9532)

Thursday, May 3, 2012

The Nice - Osaka Gas (JP:9532)

Company Overview

Osaka Gas Co., Ltd was founded in 1897 and is headquartered in Osaka, Japan. Osaka Gas is mainly involved in the supply and sale of gas, gas appliances, and liquified petroleum gas (LPG) and natural gas in the Kansai region.  Furthermore, the company engages in the sale of industrial gas; production, supply, and sale of electricity; transportation of liquefied natural gas, as well as the development of oil and natural gas; and research and investment activities related to energy supply businesses.

Additionally, the company engages in the development, leasing, management, maintenance and sale of real estate properties, and engages in the development of computer software.

Finally, through its wholly owned subsidary Osaka Gas Chemical, it involves in the production and sale of carbon fiber and its applied material (molded insulators, nonwoven felt, lightweight acoustic insulator); the production and sale of activated carbon fiber and adsorbent (air-conditioning filters, water purifier cartridges), as well as the production and sale of fine materials (for liquid crystals, optics, and electronics field).

The company's service area includes 69 cities and 41 towns in six prefectures. The company serves approximately seven million customers and is, after Tokyo Gas, Japan's second largest gas provider.

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Analysis of Operations

In the last 17 years Osaka Gas had only one loss year, which was due to the great Kobe earthquake in 1995. It has been able to (almost) constantly growing its sales, with only 3 years (out of 17) seeing a sales decline, at an average growth rate of 4% p.a. 

Operating margins at Osaka Gas are rather volatile. After a quite impressive run- up of operating- and net-margin from 1995 til 2006, margins compressed quite significantly up until today.

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The main driver of this margin compression are higher input prices (e.g. cost of goods sold). Gross margin shrank significantly from 51% in 2000 to 33% in 2012.Only due to strict cost control on the administrive level (e.g. SG&A expenses) Osaka Gas was able to avoid further detoriation of its operating- and net-margins.

Aforementioned margin compression has also affected  ROE, ROA and EPS readings, but to a lesser extent.

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Earning per share (EPS) averaged ¥16 (17 Years), leading us to an average Price/ Earning ratio (P/E) of 20. Actual EPS stands at ¥22 ==> P/E (actual) of 15.

ROE and ROA averaged 6,6% and 2,7% respectively.

Operating metrics are rather sobering lately, but between 1995 and 2006 Osaka Gas had shown, that its got significant earning power and was able to unleash it.

Cash Flow Analysis

Osaka Gas (as all utilities) engages in a very capital intensive business, manifesting itself in high capex requirement.

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Nevertheless, Osaka Gas was able to generate a decent free cash-flow in the past. Unfortunately, margin compression also has had its toll on cash flow readings lately..

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Operating cash flow per share averaged ¥37 (17 yrs.) ==> P/OCF (aver.) 9.
Actual OCF per share is ¥59 ==> P/OCF of 5.

Average Free cash-flow per share stands at ¥21 ==> Free cash flow yield (aver.) of 6,5% and actual FCF per share is ¥17 ==> Free cash flow yield (actual) 5,4%.

Against the background of being a capital intensive utility stock, those FCF metrics are satisfactorily.

 Difference between P/E and P/OCF is significant and mainly attributable to high depreciation charges.

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Balance Sheet Analysis

Osaka Gas has got a substantial amount of debt on its balance sheet. Nevertheless, it has been able to increase its equity ratio significantly in the past, from 30% (1996) to 48% (2012).

Current Assets; Current Liabilities and Cash

Especially liquid assets/ liquid liability composition has changed favourably at Osaka Gas.

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Current ratio as well as the more stringent acid test ((current assets - inventory)/current liabilities) wasn't very favourable at Osaka Gas up until 2005. I wouldn't regard it as precarious, as cash-flow was always adequate to satisfy current obligations. But 2006 brought about a quite impressive turn-around in those metrics and current assets are now more than adequate in relation to current liabilities.

The more favourable liquid position is validated by Osaka Gas's cash position.

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Property, Plant & Equipment (PP&E), Long Term Liabilities and Interest Bearing Debt

Osaka Gas has got a substantial amount of PP&E on its books, which hasn't seen neither a decrease nor an increase in the last 17 years. Property valuation at Osaka Gas's balance sheet is conservative.

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Although, total liabilities came down quite a bit between 2001 and 2004, Osaka Gas has never been very determent in reducing its debt. It wasn't really obliged to, as interest coverage has been satisfactorily most of the time (interest expenses not netted with interest and dividend income).

But especially in a deflationary environment (albeit mildly) I always like seeing a reduction  in debt. A rule of thumb in a deflationary environment is: debt destroys shareholder wealth.

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But is that the case with Osaka Gas?

Book Value

By no means!

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Not only has Osaka Gas increased book value on a per share basis, due to significant share buy-backs, but also on an absolute basis Osaka Gas constantly added value for its shareholders.

Absolut book value has seen an average growth rate of 2% p.a. in the last 17 years and BPS 4,3% p.a.

Not even the margin compression had any negative impact on the accumulation process of book value. The  5 year average growth of absolut book value is with 2,2% even slightly above its 17 year average.

One explanation could be, that Osaka Gas tends to have a surplus on its comprehensive income balance, thus not effecting negatively its equity.

Analysis of Dividends and Treasury Stocks

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Nice that the management explicitly mentions its intention to letting shareholders participate on the company's success (one doesn't see that very often with a japanese company).

But in Japan it's more important what people do and not what people say!

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For being an utility stock, Dividend pay-outs are rather dissapointing at Osaka Gas. Dividends haven't seen any significant growth in the last 10 years.

But dividends are not the only means the management can let shareholders participate on the company's profits. Another alternative are share repurchases, and it seems that Osaka Gas's management tends to favour share buybacks over dividends.

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Accumulation of treasury stocks is significant.

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Pay-out shows different readings including stock repurchases.

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Basic policy on stock repurchases is the cancelation.

Regarding pay-outs, management at Osaka Gas is sticking to its words and a significant amount of Osaka Gas's profits are distributed to its shareholders.


On the one hand margin compression is a negative and very likely the main driver keeping Osaka Gas's  share price depressed.

On the other hand Osaka Gas has been able to strengthen its cash position significantly, turn around the current ratio (as well as the more stringent acid test) and constantly growing its book value on an absolute basis, while buying back roughly 20% of its shares outstanding in the last 12 years.

Additional Information

Osaka Gas, as well as NTT, can be purchased on German stock exchanges (no ADR's). Liquidity is low, but market makers are reliable  (my experience so far). Watch out for bid/ask spreads though!

A great article on japaneses utility stocks was written by Clemens Scholl and can be found here:

Disclosure: long Osaka Gas

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