Air Water (4088)
The last bargain industrial gas company?
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Introduction
Air Water is Japan’s #2 industrial gas company, with c. 30% share in air separation gases. The market leader, Nippon Sanso, holds closer to c. 40%.
Why should you pay attention? Because it’s an industrial gas company still flying under the radar of most global investors, and it might just be the last clear “bargain” still left in this amazing sector.
But of course, there are reasons for this: Air Water has long struggled with both a lack of focus and a lack of growth.
The lack of focus is almost legendary. Since 2000, Air Water has made 245 acquisitions, most of them unrelated to industrial gas. The company happens to be Japan’s largest producer of table salt (42% share) and also raw ham (30% share). Yes, you read that right. And the list goes on — the company is a bottler of canned and bottled juice beverages, producer of aerosol sprays, sells electricity from its own biomass power plants, processes vegetables, owns a supermarket chain, makes construction supplies…you get the point.
Even in its industrial gas business, the business returns in Japan have historically been unattractive. The market offered no growth and pricing has remained flat. This stands in contrast to most other developed markets, where industrial gas has been a standout business.
However, there are some signs of positive change:
Air Water’s industrial gas business is improving.
In Japan, margins are expanding thanks to pricing increases and contract rationalization. The growth of Japan’s semiconductor industry has also been a tailwind, as new fabs require steady supplies of nitrogen and specialty gases.
Air Water has been growing outside Japan; it became the #3 player in India after it bought the Indian assets of Praxair and Linde in 2019, and the company also has operations in the US.
There is a governance improvement story here, although I’d characterize it as still in the very early stages. The new mid-term plan announced in June marks a shift in focus from topline growth to profitability, with plans for business exits and divestments, as well as a 1 trillion yen market cap target.
The chart below compares the 10 year performance of Air Water and Nippon Sanso, its main Japanese rival. The performance gap between the two should continue to attract investor attention and add pressure to Air Water’s management. Will it finally be Air Water’s turn to re-rate?
There hasn’t been any activist involvement yet in the name, and I see this as a good set-up. Air Water has no controlling shareholder, trades below book, owns many noncore assets that can be divested, and importantly, industrial gas is a high-quality, globally proven business model with the potential to command a significantly higher multiple.
For global investors, this is a chance to buy a longstanding industrial gas company at a valuation that could, in hindsight, look absurdly cheap.