Deep-dive 2021-15: Okamoto
Okamoto Industries (5122 JP) is a family-run household products and industrial materials company based in Japan.
The company is best known for its condom business, which ranks as the #3 globally. The brand name is strong in Asia, where Okamoto dominates the premium segment. The operating margin for Okamoto’s condom business is around 30%, and it has a clear technological leadership that protects it from the competition.
The growth potential for Okamoto’s condom business comes primarily from China, where usage rates are low compared to Hong Kong or Japan. Okamoto’s management believes that the Chinese market will grow 2-3x in the future. Given Okamoto’s already strong brand name in China, Okamoto is well-placed to capitalise on future growth in China’s condom industry.
Besides condoms, Okamoto also sells a range of other household products such as dehumidifiers, heating pads, rubber boots and gloves. These products are almost entirely sold within Japan. While it is a slow-growth business, the margin and cash flow profiles are decent.
Okamoto’s industrial products segment manufacturers automotive interiors, wallpapers, kitchen wrap, plastic films, etc. While Okamoto’s market position within these segments is generally strong, it is more cyclical, and the company has a certain reliance on its key customer Honda Motor Company.
COVID-19 have been a net negative for Okamoto as consumers have spent less on condoms during their lockdowns. The auto interior business also suffered due to production stops and auto parts shortages. The glove business did well but not enough to outweigh the other negatives. So COVID-19 has been weighing on Okamoto and recovery would most likely help Okamoto financially.
Okamoto has practically no debt and a large cash position on its balance sheet. It also has a large portfolio of investment securities that are accounted at historical cost and don’t fully show up in earnings. Combined, these items represent close to 60% of the market cap. The company is an active purchaser of its own stock and has been price-sensitive in the past. These factors provide a cushion on the downside, in my view.
Top-line growth is likely to remain low. The condom business remains the largest growth driver, and that will help Okamoto’s overall margins to expand. Assuming single-digit top-line growth, a 12% operating margin by 2024 and a target 18x P/E multiple in line with historical levels and peers, a theoretical upside to intrinsic value is likely to reach +81%.
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Deeper Chinese condom penetration could see the shares explode. With current penetration only 10% deep—vs 50% in HK—we are likely seeing just the tip of opportunity for a company that could grow for a long time to come.