´´ Hogy Medical (jp:3593) - Hasn't always to be a net-net

Saturday, April 14, 2012

Hogy Medical (jp:3593) - Hasn't always to be a net-net

Company Overview

Hogy Medical Co., Ltd was founded in 1955 and is headquartered in Tokyo, Japan. Hogy Medical is one of the top players in the japanese nonwoven surgical-use disposable products market. Beside mekkin bags, it engages in the manufacture and sale of sterilized nonwoven fabric, like (among other things) surgical gowns, drapes, caps, underwear and equipment covers.

Furthermore it offers Opera Master, a product, logistics, and information management system centering around full-kit products. A kit is a packaging of the precisely required medical supplies for a surgical procedure, clinical test or clinical procedure. An example would be a sterilised catheter, syringe and scalpel in a sealed sterile pouch. Each kit is customized for specific doctors and types of surgery.

Thus, Opera Master is a solution-based system, incorporating product-, logistic- and information management, and is designed to help hospitals improve operating efficiency, reduce inventories and control costs.

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Analysis of Balance Sheet

Given that Hogy Medical is not a net-net investment, e.g. the stock is trading at a premium to net- current asset value (NCAV), balance sheet analysis is only of minor importance for evaluating Hogy's attractiveness.

That does not mean at all, that its balance sheet is irrelevant. The quality of a company's balance sheet is always of utter importance for an investor! But operating- and cash- flow metrics (among others) are much more relevant for determining Hogy's potential.

Overall state of Hogy's balance sheet

Hogy Medical is debt free and has an impressive equity ratio of 87%. The current book value per share (BPS) stands at ¥ 3715. The company has been able to grow its book value by an average of 5,7% p.a. in the last 12 years.

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 Let's dig a little deeper and evaluate the composition of Hogy's balance sheet.

Liquid Assets


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40% of Hogy's market cap are in liquid assets. Cash & short- term assets represent the biggest chunk of Hogy's current asset portfolio, which is very comforting, and has got a value of ¥ 1135 per share.

NCAV (current assets - all liabilities) is worth ¥ 1435 per share. Investment securities in Hogy's balance sheet play a minor role. Its investment portfolio is valued at ¥ 227 per share.

Therefore current assets plus the investment portfolio is worth a ¥ 1662 per share. That represents already 50% of Hogy's total market capitalisation.

But Hogy has more to offer, as a substantial amount of its assets are comprised of property, plant and equipment.

Property, Plant and Equipment (PP&P)

Hogy's fixed assets are valued on its books at ¥ 31518 (Mios.of Yen) or ¥ 1933 per share. Most of Hogys fixed assets are very specialized plants and equipment, which would be hard to dispose of and therefore are only of limited value.

But there is a hidden gem in Hogy's PP&P account, which is its (new) headquater building in Akasaka, Tokyo, located close to the imperial palace. It was inaugurated in 2002, is a free- hold and even for euopean standards (let alone japanese building standards) the architecture and structure looks great.


Given I am not willing to grant any value to Hogy's plants and equipment (although they very likely have), I am discounting Hogy's PP&P account by a factor of 0,3. That is leaving us with a per share value of  Hogy's PP&P account of roughly ¥ 600 per share.

Summary Balance Sheet

  • NCAV per share = ¥ 1435                       ==>
  • Investment securities per share =¥ 227     ====> SUM = ¥ 2262
  • PP&P per share = ¥ 600                          ==>

 Analyisis Of Operation 

Hogy operates in a high margin business and its operating metrics are very stable over time. Neither the bursting of the dot-com bubble nor the financial crisis of 2008/2009 had any significant impact on its sales figures. Although those crisis temporarely compressed Hogy's operating- and net margins a little bit, they recovered swiftly to its mean in the aftermath.

Operating Margins

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Those high and steady operating figures are mainly due to the fact, that Hogy has got its labour intensive production facilities in Indonesia and markets its products solely in Japan. Therefore it is rather isolated from the yen exchange rate and turmoils in the international financial markets.

Average sales growth for the last 12 years was 3,8% per annum. 13 year average operating margin came in at 25%, with a high of 28% in 2002 and a low of 23% in 1999. Net margins averaged a 14%, marking its low in 2009 (11,5%) and its high in 2010 (15,7%).

12 year net income growth averaged a 5,6% p.a. in- line with the operating income growth (5,6% p.a.). Even though sales growth has stalled lately, Hogy was able to maintain its operating margins on elevated levels. This is mainly due to rigid cost control and productivity gains Hogy pursuits.

Hogy's earnings, ROE and ROA 

Hogy's 13 year average earning per share (EPS) is ¥ 221 leading us to an average P/E ratio of 16. Actual EPS (2011) is ¥ 272 ==> P/E (actual) of 13. If Hogy was able to maintain the actual earning power, it would take roughly 13 years for an investor to recoup its intitial investment (at least in terms of retained earnings).

Average return on equity (ROE) stands at 8,2% and the actual ROE is 7,3%. Average return on assets (ROA) and actual are 6% . Those are very satisfiable figures. Especially the one on ROE, taking into account Hogy's high equity ratio.

Analysis of Cash flow


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Operating cash- flow

Hogy was able to grow operating cash- flow significantly, with an impressive 12 year averge growth rate of 14% p.a. 13 year average operating cash - flow (OCF) per share is ¥ 345 leading us to an P/OCF(aver.) of 10. Actual OCF per share is higher ( ¥ 444) than its average, leading us to an P/OCF(actual) of 8.

Free cash- flow, Capex and Depriciation

Although free cash- flow has been growing, the growth rate wasn't as high. This is mainly due to an increase in capex expenditure for the extension of a new sterilization center on its Tsubuka plant sites. It commenced full-scale operation in May 2011.

13 year average free cash-flow (FCF) per share is ¥ 150 ==> P/FCF (aver.) of 23
Actual FCF per share is ¥ 229 ==> P/FCF (actual) of 15

Free cash-flow yields are therefore 4,3% (average) and 6,6% (actual).


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The increased capex expenditure will very likely lead to an increase in depreciation expenses in the near future, as it did in the aftermath of the construction of the new head office building (2000-2002), the Tsubuka plant (2003/2004) and the new distribution center in 2006/2007.

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Even though depreciation charges are likely to cap earning growth momentum, reduction in future capex expenditure will have a positive effect on Hogy's free cash- flow metrics.

Analysis Of Dividend And Treasury Stocks  

Hogy is actually paying a quarterly dividend of  ¥ 25 (=  ¥ 100 annualy). Dividend growth  has averaged 16,75% p.a.in the last 13 years.

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As shown in the chart above, the dividend growth is not mainly attributable to an increase in net- income, but rather due to an significant increase in Hogy`s pay- out ratio. Its hinting us to a heightened awareness of the management to let the sharesholders participate on the profits the business is generating.

Having said that, Hogy's policy on purchases and distribution of treasury stocks is a little confusing.

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From 2001 to 2009 Hogy repurchased a substantial amount of its stocks. But in 2010 it disposed  ¥ 3100 (Million) in treasury stocks, resulting in a stock dilution. It argued, that the proceeds were needed for the extension of the sterilisation center. This argumentation is absolutely incomprehensible, given the huge ammount of cash on hand and the sufficent cash- flow generated by Hogy's operations.


Hogy Medical seems to me an opportunity to invest in a very good business for a very reasonable price.

The products and services Hogy Medical is offering to its clients (e.g. hospitals) enables them to increase efficiency, as well as reduce and control its cost base. In an environment of ever increasing health care cost and pressure from the health care system on the renumeration of hospitals, controlling and reducing cost is crucial for their survival.

Operational-, earning- and cash flow metrics are all favourable. Also Hogy's dividend history and policy is encouraging.

Drop of bitternes is Hogy's muddy and inapprehensible policy on stock repurchases and its limited ability to boost sales in the recent past. To get sales growth back on track, Hogy invested substantilly in its business. It looks like Hogy has completed its business expansion cycle, which hopefully will lead to a higher sales, earning and free cash- flow path in the future.

(Disclosure: long Hogy Medical)

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