A funny one.
Konica Minolta is a multinational imaging company incorporated and headquartered in Japan. It is listed on the Tokyo stock exchange and trades OTC in the US. Konica provides imaging and print services, manufacturing machines, managing software, and research and development in healthcare and industrial imaging to over 2 million customers. Its products enable corporate clients to output high-quality signage and other print and imaging products, to exhibit a higher level of professionalism for its customers’ brands. The principal lines of KNCAY business are labelled Office, Professional Print, Healthcare, and Industrial – well-diversified and aimed at high-demand areas of the global economy. The two growth engines of the business at the moment are Healthcare and Industrial, comprising 27% of revenue in 2021, up from 24% a year prior.
KNCAY has underlying legacy businesses with histories dating to the late 1800s: an excellent lesson in a culture of staying power. And this one shows: annually, management prepares an integrated report detailing where they would like to steer the company, most recently through 2030. If it can keep its various customers happy, IH readers have a nice asset on their hands trading for less than 0.4x book value and EV to EBITDA of 5.97x. The Company also pays a nice 5.2% dividend based on its share price of ~$6.50. On the surface it looks to be a steal, and very attractive for an Inverness portfolio.
Despite these nice statistics, the stock price has fallen from $20/share in 2019 to the $6’s as of July 2022. If it had all these great characteristics, why are investors continuing to sell off the asset? KNCAY saw a revenue decline of $1.1 billion (13%) from 2020 to 2021. It was able to stem some of the bleeding, but still saw an EBITDA decline of 28% and margins shrink 150bps. Additionally, in FY2022, the company saw a significant toner shortage and supply chain difficulty in 2021, due to two explosions at its toner factory driven by fumes catching fire in its drying process. This was approximately eight months ago, so expect another tough fiscal year in 2022 reporting.
KNCAY did have an adequate balance sheet to weather those storms, with a current ratio of 1.46x, a regular cash balance of about $1 billion, and 2021 receivables of $2.3 billion, but has approximately $3billion in total debt, or leverage of 5.14x (net leverage is reasonable at 3.12x). Cash is 30-40% of total debt, luckily, as the company expects these toner and supply chain issues through 2023.
Certainly the old print and imaging businesses of the past were significantly disrupted by COVID. Millennial consumers are more connected to their phones than papers, and digital imaging looks to be the way of the future. The tough questions though: Are they providing deep value add to the customer? Do they know who their customers are? Is management good at articulating what their customers need, and then delivering on those demands in a profitable manner?
Other than the boots-on-the-ground business referenced above (toner factory explosions and supply chain issues), the Company seems to be taking a scattershot approach to its business model, with a massive menu of products. Its expertise is imaging technology. With 2 million customers, this diverse approach might be necessary, but IH’s opinion is that the CEO does not really say anything specific in his annual report over the past three or four years about which customers they are trying to focus on. Additionally, the Company has shown itself to be wading into the Environmental and Social Governance market, commenting on fixing climate change with its cameras.
To be fair, a multi-billion dollar company with operations around the globe and 2 million customers will have a highly complex shareholder report, perhaps out of necessity. But, rather than bowing to the ESG approach and trying to get every customer possible, investors might be better served if the company took a focused approach to its market, rather than one by committee. This might dam up floodwaters in tough years and provide a more solid platform for growth in good years.