DMW Corp(TYO.6365)

Net-Net, PER=7x, Dividend>4%, Solid government budget for aging Japanese infrastructure is supporting DMW business.

Summary

• Business : Pumps, fans, blower equipment used for social Infrastructure(ex. waterworks, dams, electronic power plant and chemical plant.)

• Valuation : Net-Net, PER=7x

• Dividend: 170 yen (FY2025 forecast), expected dividend yield = 4.2%, expected payout ratio = 30%

• Future Catalyst : Margin expansion(Contract price rise), Overseas business growth, Shreholder return improve.

• Risk : Infra maintenance budget cut due to huge debt of Japan

• My Position: Holding (average buy price = 3,974 yen)

Business Analysis

Understanding at a glance

What does DMW do?

DMW is a company which produces pumps, fans, blowers, equipment. These are used for infrastructure such as waterworks, dams, electronic power etc. Most of Revenue(70%) comes from public agency and electric comapany. Even though their product is niche, DMW supports Japanese social infra.

*Above image is the one example. Pump(#1, #2) is used for transferring dirty water to the sewage plant. Also, blower(#3) is used for sending air into purifying water process.(Link)

Stable infra maintenance budget in Japan & Stable(Growth) business performance

Let’s look into business performance. DMW sale/profit has grown over 10 years.

*Gray bar is sales, Red bar is operating profit, Red line is operating profit margin.

*Sales 10 years CAGR is 4.81%, Operating profit 10 years CAGR is 10.62%.

*Operating profit margin improved 6.54% → 11.23%.

In Japan, many social infra has passed over 50 years after built. For maintenance, government has spent over 5 trillion yen every year since 2018. Due to stable government budget, DMW has achieved solid business performance. Aging social infra is an inevitable trend, so Government assumes that maintenance cost will increase in the future.

*Above image indicates the ratio of social infra which passed over 50 years after built. The number of aging social infra will increase rapidly 2020→2024.(Link)

*Recently, the accident, road collapsed occured due to sewer pipe deterioration, one truck driver fell into and he has not been found yet. This news is becoming the hot topic which shows Japanese infra aging is the serious problem.(Link)

*Estimated future maintenance cost for social infra. Due to aging infra, the cost will increase.(Link)

To reduce overall future maintenance costs, government takes an approach ‘Preventive maintenance‘ which means taking measures such as repairs before any problems arise. (*For comparison, ‘Post maintenance‘ is taking measures after any problem arise.) Based on the above policy, DMW proposes long-term maintenance package when their product is purchased. Maintenance cycle is long-term, so reliability is important. DMW which has long business relation with a public agency is more favorable to take a contract.(*DMW founded in 1902 is a company with a long history.)

*Governement estimates ‘Preventive Maintenance‘ cost less than ‘Post Maintenance’.(Link)

Also, government tries to increase the contract price of public works due to the recent inflation situation in Japan. Although Japan faced a long-time deflation, now government is encouraging private companies to pass on price for ‘Virtuous cycle of Price and Wage‘ called in Japan. Contract price rise supports DMW decent operating margin.

*Link

Growth Driver : Overseas Order Increase

DMW is building/Expanding the facilities in India to produce products and sales to overseas in Asia, Middle East, Africa. The ratio of overseas order is increasing.(2021=8.0%→2023=21%) The latest long-term target is 27% in 2030.

*’海外事業受注高/比率’ is Overseas Order and Ratio. (Link)

DMW focus Desalination business in the situation where the demand of desalination plant built/maintenance increases.

*Example of desalination product used in Saudi Arabia. (Link)

Although upfront investment is required and depreciation will increase at first, if DMW continues to get orders from overseas, sales growth/operating margin expansion will be achieved.

Valuation

Based on the latest financial position in FY2025 Q3, it’s Net-Net stock.

Looking at DMW asset structure, cash + accounts receivable accounts for 95% of its current assets.

“Cash to distribute for shareholders“ + PER valuation has the upside 84%~131%. Current PER=7x, but I believe that assumed PER = 10x is still conservative, considering the stable business performance and the future growth driven by overseas business.

Shareholder Return

DMW has increased dividends every year. Recently, dividend rise was announced, the latest expected dividend is 170 yen with a yield of 4.2%. (*At the same time, an expansion of shareholder benefits was also announced. But overseas investors can’t get it unfortunately.)

*Forecast dividend revision was announced in 2025/02/14. (Link)

Also, share buybacks(2.5% of outstanding shares) was executed last year.

*Link

Dividend rise and share buybacks are evidence DMW tries to distribute to shareholders. Considering the healthy financial position, solid business performance and payout ratio(30%), I believe that there is room for shareholder return.

Risk : Infra expenditure will continue?

Japan's public works budget peaked in the 1990s and shrank in the 2000s. Democratic Party achieved a change of government by calling the slogan "From Concrete to People." In 2011/2012 when Democratic party lost government and Liberal democratic party revived, public works budget was bottom, then turn around with aging infra, disaster mitigation context.

*Link

*Democratic Party’ campaign material in 2009. Yellow highlight said budget should be used for people not for concrete. They got a huge victory in the election on that year.

Nowadays, many people agree with infra maintenance is important to mitigate the risk of earthquake, road collapse, etc. However, Japanese huge debt is the serious problem. If government faces the trouble of financing, infra maintenance budget cut may be required.(*Actually, social welfare, pension, medicare account for most of the total budget, so we must re-consider them at first…)

Conclusion

Although Japan has a huge debt, government sustained infra budget and will continue based on the aging infra problem. This is the base scenario. DMW continues to get benefit from this macro trend in decades. Moreover, there are many overseas countries where infra facilities are premature, and they demand DMW products. I believe the external environment Japan/Overseas both is good for DMW. After the announcement of dividend rise, the stock price was up, but it goes back due to Trump tariffs uncertainty. I bought DMW shares at that time. Tariff effect is limited to DMW business whose customers are mainly public agencies.