Osaka Securities Exchange
Ticker: 7944
Recommendation: BUY
Current Price: ¥915
Target: ¥2000
Allocation: 8%
Roland Corporation – David Adamse
Roland Corporation: Investment Analysis
Recommendation Summary
All figures in tables and analysis are in millions Yen, except share data or as otherwise indicated
Valuation Methodologies and Ranges
Market
Market Value (March 10, 2010)
¥22,973
Per Share
¥915
Earning Power Value
% Margin of Safety
Cost of Capital
10%
12%
51,905
43,874
56%
48%
Adjusted Net Asset Value
% of Gross Assets in Cash
% Margin of Safety
49,169
40%
53%
Roland Corp 5-Y Price Chart
4000
3500
3000
3%
4%
5%
Cost of Capital
10%
50%
53%
57%
Yen
2000
1500
1000
500
With a current market valuation of less than 50%-60% of each of measures of earnings power value,
adjusted net asset value, and discounted cash flow value, I recommend buying Roland Corporation. The market
appears to undervalue Roland Corporation due to its high degree of exposure to consumers, the discretionary
business investment environment, fear over the Japanese Yen’s impact on exports and the masking of its 3D
imaging business. Compounding these cyclical concerns may be a lack of understanding of the customer captivity
of its largest segment (musical instruments). As a musician across multiple instruments I own many of Roland’s
products1 and am very familiar with customer behavior in this segment.
Furthermore, its peripherals business
(largely 3D printing, milling and other image-realization hardware) is relatively profitable but appears to receive a
discount due to its combination with the musical instruments business (see Exhibit 6 for segment comparables).
Most measures suggest that Roland exists in competitive industries with few barriers to entry (EPV equals
the reproduction cost of assets and the company experiences low but consistent returns on assets). Roland does
hold, however, some product-specific scale advantages (most notably within electronic drums and keyboards). The
very different two industries it competes in also masks their relative competitive positioning, with its musical
instruments segment experiencing low profitability but its imaging (“peripherals”) segment showing double
digit pre-recession operating profits and growth. Even without assuming any significant franchise there remains
a significant margin of safety in the current market price; a disdain for its major product segment (musical
instruments) and market segment exposure (consumer and industrial discretionary), a lack of analyst scrutiny and
even some narrow scale advantages, further bolster a favorable view of this as a beaten-down, lower-risk selection.
1
It is interesting perhaps to note the current “market share” of Roland products in my own home, in segments in which they
compete: keyboards 100% (1 of 1), electronic drums 100% (1 of 1), studio monitoring speakers 100% (1 of 1), effects pedals
57% (4 of 7), guitar amplifiers 50% (1 of 2), multi-track recording systems 0% (0 of 1).
1
M -10
S-09
M -09
S-08
M -08
S-07
M -07
S-06
M -06
0
12%
38%
40%
44%
S-05
DCF Margins of Safety
Terminal g
3%
4%
5%
Cost of Capital
10%
12%
45,733
36,874
49,162
38,545
53,963
40,693
2500
M -05
Discounted Cash Flow
Terminal g
49,169
40%
53%
Roland Corporation – David Adamse
Screening & Search Approach
I screened along the following metrics prior to deciding upon an in-depth analysis of Roland Corporation.
• Screen 1:
o Market capitalization between $50MM - $1,000MM
o Price / Book Value: lowest decile relative to S&P 1000
o Average daily volume <25% of screen value
o Daily close % of 5-year high < 35%
o (EBITDA – Capex) / Interest Expense > 2
o Domestic markets and indexes
• Screen 22: This Screen Yielded Roland Corporation
o Market capitalization between $100MM - $500MM
o Price / Book Value < 1
o Net Debt / (EBITDA – Capex) < 5
o Daily close % of 5-year high < 25%
o Number of analysts covering < 2
Business Description
Roland Corporation, through its primary operating company and subsidiaries, manufacturers and markets
electronic musical instruments (59% of sales) and computer peripherals (41% of sales). Over the past five years its
computer peripherals business (which I refer to interchangeably as its imaging business) has contributed the bulk of
growth and earnings. Its musical instrument business includes everything from guitar effects pedals, to keyboards,
electronic drums and recording devices. Outside its keyboards and drums business, most of its products are
accessories to other instruments, with unit prices that are generally a fraction of the price of the related instruments.
While difficult to quantify precisely in each category, certain of Roland’s product segments enjoy significant
product shares. Its electronic keyboards and drums are dominant products in their respective segments, with very
strong reputations among musicians. Its computer peripheral business includes high-end business printing solutions
as well as computerized jigging units for 3D manufacturing. A table listing significant competitors in both the
musical instruments and computer peripherals business is provided in Table 2. It is quickly apparent that the
intensity of competition varies greatly among its segments.
Table 1: Segment Information – Peripherals is Where the Growth and Profits Are At!
Musical Instruments
Sales
% growth
Operating Income
% operating margin
ROA - Musical Instruments
Peripherals
Sales
% growth
Operating Income
% operating margin
ROA - Peripherals
2004
2005
2006
2007
2008
¥49,715
¥58,005
16.7%
2,410
4.2%
2.6%
¥56,927
-1.9%
2,660
4.7%
2.5%
¥62,944
10.6%
3,285
5.2%
3.2%
¥58,875
-6.5%
1,490
2.5%
1.5%
31,269
19.4%
5,965
19.1%
13.4%
38,332
22.6%
7,183
18.7%
14.8%
45,616
19.0%
10,049
22.0%
16.7%
41,631
-8.7%
5,941
14.3%
10.7%
Musical Instruments
1,516
3.0%
1.8%
Peripherals
41%
59%
26,191
5,227
20.0%
13.2%
2
I ran two screens and there were more opportunities globally than domestically (few U.S. companies passed my first screen). I
then analyzed the screen results manually to narrow the selection to companies that were either in familiar industries or for which
I could both determine their industry and had an interest in further exploration (disfavored industries). The first company that I
looked at in-depth was Maritime Industrial Services, an oil & gas exploration industrial services and fabrication company located
in the United Arab Emirates. While initially promising, further financial analysis suggested that they had cash flow concerns and
potential solvency issues. I also felt the company was more an investment in a recovery of commodity prices and the global
economy than a pure value investment. The next company I looked into was Roland Corporation, also a result of Screen 2.
2
Roland Corporation – David Adamse
Industry Overview: Musical Instruments
Roland’s musical instruments product category (58.6% of sales) includes electronic drums, keyboards,
speakers and amplifiers, guitar effects pedals and recording devices. Each product is generally a category in itself
(i.e. guitar effects pedals do not compete with keyboards or drums), though some overlap does occur (amplification
units with built-in effects). Market share in each category is difficult to ascertain as there is little industry data.
Using the number of companies in each segment, however, may serve as a proxy for relative market shares. In
guitar effects there is significant competition, with over 30 brands counted, in keyboards there are eight major
competitors (Casio, Korg, Kurzweil, M-Audio, Nord, Roland, Williams and Yamaha), with perhaps four operating
across the full range. In electronic drums there are only two major competitors (Roland and Yamaha) and two
smaller competitors that offer entry-level kits. In guitar amplification Roland is a relatively minor competitor, with
traditional guitar manufacturers Fender and Marshall dominating the product range.3 Customer behavior in musical
instruments varies by experience – professional or semi-professional musicians tend to have significant brand
loyalty and fidelity requirements. Entry level customers are often buying on behalf of others (parents purchasing
first instruments for children) and so may tend to be more price-conscious. Roland has a reputation within the
musician community for high build quality, particularly within the drums, keyboard and guitar effects categories.
Such customer loyalty and brand recognition may partially account for Roland’s strong market share in the
electronic drum and keyboard categories – these are mature segments that have very few, well-known players.
Chart 1: Margins & Revenues by Segment – Big Dips Down Spook Shareholders?
Revenues Musical Instruments (% change)
Operating Margins Musical Instruments (%)
Revenues Peripherals (% change)
Operating Margins Peripherals (%)
25%
25%
20%
20%
15%
15%
10%
5%
10%
0%
5%
-5%
2005
2006
2007
2008
-10%
0%
2004
2005
2006
2007
2008
-15%
Industry Overview: Computer Peripherals
Roland also sells what could be called imaging realization equipment, which they divide into two
categories; color and 3D. This broad segment contributes 41.4% of sales and an even greater proportion of earnings
with operating margins hovering around 20% over the past five years. This segment is highly cyclical, with most of
the products related to advertising, new product development and jewelry. The prices of these types of equipment
are high and unrelated to the consumer printing business – many of the milling and printing products are in the
$20,000 - $60,000 range. The industry is difficult to segment (there is little data on the total number of direct
competitors) but an incomplete listing is provided in Table 2. What becomes apparent is that while there are a
3
Roland holds a stake in Fender Musical Instruments
3
Roland Corporation – David Adamse
number of competitors, most of them are very small. Aggregating the revenue of the 13 competitors (for which
financials are available) results in revenues approaching $325MM. This compares to Roland’s revenues in that
segment of just over $450MM (at the current exchange rate).
Combined with strong historical operating
profitability, this suggests that Roland has scale or technology advantages in this product category. This, along with
the clear cyclicality of the business it serves (many of the printers are wide-format industrial printers for
advertising), suggests that it is a business that might have some franchise power. Regardless of whether franchise
power exists, it is clear that this segment is out of favor – advertising-related, jewelry-related, and business
discretionary – suggesting that there may be too great a discount by the market.
Table 2 – Segment – Electronic Musical Instruments
Table 3 – Segment – Peripherals / 3D Printing
Segment Competitive Mix
(Musical Instruments)
Segment Competitive Mix
(Peripherals/Imaging)
Effects
Keyboards
Drums
3D Printing / CAD
Brands
Aphex
BBE
Blackstar
Carl Martin
Dan Armstrong
Danelectro
DeltaLab
Devi Ever
Digitech
Electro-Harmonix
Fishman
Fulltone
Ibanez
Line 6
Modtone
MXR
Pigtronix
Radial Engineering
Rocktron
Seymour Duncan
T-Rex Engineering
TC Electronic
Tech 21
Visual Sound
Voodoo Lounge
Vox
Way Huge Electronics
Zvex
Casio
Korg
Kurzweil
M-Audio
Nord
Roland
Williams
Yamaha
Roland
Simms
Traps
Yamaha
3D Systems
CMET
Dimension
EnvisionTec
EDS
Mitsui & Co.
Next Factory
Northstar Technologies
Objet Geometries
Solido
Solidscape
Stratasys
TS Corporation
Z Corporation
Decreasing number of
competitors, increased share
concentration suggests
potential franchise value in
keyboards and electronic
drums, but no barriers to
entry present in effects.
Revenue (USD)
Total Revenue (disclosed)
Roland Segment
111.3
9.72
17.05
69.32
98.36
18.1
323.85
$459.07
Exchange rate:
0.011027 Yen/USD (March 10, 2010)
Key Business and Industry Takeaways:
•
Both in combination
o
•
•
low ROA in musical instruments masks high returns on capital in peripherals
Musical Instruments
o
disfavored – exposure to the global consumer in a discretionary product category
o
market share strength in limited sub-categories such as keyboards and electronic drums
o
customer loyalty is high and company maintains strong reputation
o
profitability has been consistently low but stable, reinforcing competitive equilibrium on-balance
Peripherals (i.e. printing and imaging hardware/software)
o
provides bulk of profits and revenue growth
o
many competitors but Roland has large share of 3D imaging market –product scale advantages?
o
franchise may exist but is not necessary – industry segment likely highly-disfavored
4
Roland Corporation – David Adamse
Valuation Assumptions
All three valuation methods used suggest Roland Corporation has an equity value significantly greater than
the current market valuation of ¥22.97bn. The three methodologies are provided in the exhibits. Below I detail the
key assumptions underlying each valuation. A look at historical valuation multiples for Roland is provided in
Exhibit 6. It suggests that on a normalized earnings-basis, based on its own historical valuation multiples Roland
should trade between ¥40bn-¥55bn. Comparables, also in Exhibit 6, show that Roland Corporation is trading at the
low range of both selected musical instruments and peripherals comparables.
Adjusted Net Asset Value (ANAV, see Exhibit 1)
The adjusted net asset value measure is ¥49,169MM. This is composed of over ¥19bn in cash, with the
primary offsetting obligation being a ¥16.8bn minority stake. Adjustments to assets are generally minor but include
a modest reduction in inventory valuation to reflect potential discounting above what they may be incorporating on
the balance sheet figure, a write-up of accounts receivable to reflect the historical allowance, a reduction in the value
of the land component of net PP&E to reflect what appears to be a modest overstatement on the balance sheet and
the elimination of intangibles and goodwill. The net effect of my adjustments is a reduction in long-term assets of
¥3.3bn and of total assets of ¥3.9bn. I considered positive adjustments to assets to reflect the cost of research and
development expenditures, which are significant (between ¥6bn - ¥7bn per year) and would result in an even greater
undervaluation. I decided against this adjustment due to the potential overstatement of the value of recent R&D (the
current investment cycle may not realize much value in this market) and the possibility that current inventory
valuation may require a greater discount than I estimated. It remains worth noting this cost, however, as it suggests
a greater cost of entry than the net asset value used in my analysis, and could add ¥12bn - ¥18bn to the NAV if we
assume product life cycles in the two–three year range. The margin of safety implied by the conservative valuation
is 53%.
Earnings Power Value (EPV, see Exhibit 2)
The earnings power value of the company uses generally conservative estimates of normalized revenues
and margins to provide an EBIT estimate. The revenue figure of ¥82.9bn is using the 2009 estimate (based on
2009LTM to September). This is used in place of the 5-year average due to the realization that the consumer and
business credit environment may not return to pre-recession levels, resulting in a lower normalized earnings base.
EBIT margin is calculated based on the pre-2009 5-year average and multiplied on revenues. Applying the statutory
Japan tax rate of 39.8% (which is near what Roland Corp has recently paid in actual taxes) yields a normalized net
income figure of ¥4.819bn. I also estimated the historical percentage that is attributed to minority interest holders,
which is 27%. Rather than reducing the equity value through an adjustment to net income, however, I adjust for the
minority interest expense through treating it akin to debt. After adjusting for this quasi-debt, the actual total debt
outstanding, and Roland’s significant cash balance, and discounting at either 10% or 12% cost of capital, I arrive at
an equity value range of ¥43.9bn– ¥51.9bn, roughly equivalent to my adjusted net asset valuation. The margin of
safety implied by this range is between 48% - 56%.
5
Roland Corporation – David Adamse
Discounted Cash Flow Valuation (DCF, see in Exhibit 3)
I used a discounted cash flow analysis to determine if my ANAV and EPV estimates corresponded to the
projected cash flows of Roland Corporation under a conservative growth scenario. Highlighted in my analysis is the
significant deterioration in working capital management during the recession, as accounts payables days have been
shortened considerably. I considered two possibilities for this: first, that suppliers are requiring faster payment due
to fear of distress of Roland Corporation and, second, that suppliers for Roland Corporation’s two business segments
may themselves be under duress or distress, and so have pushed for tighter credit terms to manage their own cash
flow problems. Looking at Roland’s significant cash position and its relatively secure cash flows (even postmeltdown, EBITDA – Capex / Interest of 15x) suggests that the former is not the likely cause of this acceleration in
terms. It seems more plausible that Roland is acquiescing to more stringent credit terms from suppliers to ensure a
stable flow of inputs and components for its electronics-heavy businesses.
If, however, this analysis proves
incorrect, this would represent the greatest risk to my analysis. Assuming a very modest return to prior credit terms,
even with an assumption of stagnant sales through 2010 and a modest recovery thereafter, would result in significant
positive effects to free cash flows. My projections incorporate a compression in near-term margins and a slow
recovery towards historical ratios over the next five years. With a revenue growth assumption of 6% (off a lower
2010), lower than pre-recession history, and with a terminal growth rate of between 3-5% results in a range of equity
value of between ¥36.9bn – 54.0bn at a cost of capital range of 10 – 12%. The conservatism of the approach, which
results in a return to peak revenues after 2015, and which does not project a recovery to peak EBIT at all through the
period (which goes to 2019), suggests that the EPV and ANAV measures are reasonable and do not require even a
return to prior operating results to attain significant appreciation over current market value. The margin of safety
implied by this range is 38% - 57%.
Key Valuation Takeaways
•
Cash value as a component of valuation is significant
•
Relative valuations (Exhibit 6) suggest that estimates are reasonable:
o
Normalized FCF yields an equity value of ¥53.3bn
o
Normalized EBITDA yields an equity value of ¥41.8bn
•
Comparables show that Roland is trading at a discount to both musical instrument and peripherals peers
•
DCF analysis suggests that a partial return to prior performance would support ANAV and EPV estimates
o
Just under 50% of DCF value is in forecast period cash flows (10-years of FCF), or the rough
equivalent of the current market price of the equity is recouped in the explicit forecast period!
•
Valuations are consistent with industry and business-level analysis, and with each other:
o
Competition varies with product category, scale advantage exists in 3D imaging, drums and
keyboards, other products appear to be in competitive equilibrium with many competitors
o
Sustainability is uncertain but valuation is premised primarily on undervaluation due to market
psychology rather than the existence and/or maintenance of any particular franchise value
•
Company has consistently returned some cash to shareholders through dividends and repurchases, though
amounting to a < 4% yield on the current valuation they are modest and are likely to remain so near-term
•
Currently trading at approximately 26% of its three and five-year highs
•
Margins of safety range from 38 – 57% based on the three methodologies used
6
Roland Corporation – David Adamse
Position Sizing – 8% of Portfolio Allocation
The recent price trend is positive and the stock is trading very near its 5-year lows, while priced only at
about 26% of its 3-year and 5-year highs (see Exhibit 5). The valuation is premised on asset valuation and further
supported by earnings power and discounted cash flow estimates of value, reducing estimate risk. The main risks
are macroeconomic (prolonged downturn), inventory valuation (i.e. that the current book value of inventory, even
after the adjustment, is over-valued), and lack of clarity on accounting policies and regulations in Japan. The
tightening in credit with suppliers could also be a risk, though the Japanese supplier relationship culture is such that
this could be Roland Corporation attempting to assist suppliers (or, alternatively, acquiescing to cash on delivery
demands by suppliers) that are currently experiencing cash flow problems. The very large cash balance helps offset
these risks. Because of the relative safety of the trade (significant asset value margin of safety) I recommend 8%
of the portfolio versus a baseline 5% allocation assumption. While there is no clear near-term catalyst, there
remains a significant activist hedge fund shareholder (discussed below) that may be able to bring attention to the
company’s value proposition, particularly as the broader market recovers.
Other Factors & Risks to Investment Recommendation
Wilbur Ross & Co., in partnership with the Taiyo Fund, continues to maintain a large position in
Roland DG, a controlled subsidiary (and the operating company for the peripherals business). This position,
according to the Taiyo Fund, makes them the second largest shareholder of the company after Roland Corporation.4
This provides some evidence of sophisticated investor support for a company that otherwise receives little analyst
attention; three analysts cover Roland DG, and only a single analyst covers Roland Corporation. Furthermore, the
fact that there is a major holder that is classified as an activist fund (though publically they have endorsed the
company) may provide some avenue for a nearer-term catalyst to revaluation, either through an announcement of an
increased position or other tactic. It seems unlikely, however, that a more aggressive return of cash to investors is
likely in the very near term given the recent sharp drop-off in profitability. Finally, it is worth noting that the initial
significant position was acquired in April 2006, during a time where the market price of Roland Corporation was in
the 2,500 Yen range, suggesting the Taiyo Fund saw value at that price. The sharp decline since then is of course at
least partly a function of the economic recession – the dramatically lower price can be viewed, however, as simply
improving the appeal of the company. The fact the Taiyo Fund continues to be a holder (and had at least once
increased its stake, reportedly to approximately 9% in July of 2006, and 8.64% as of September 2009) suggests that
they too recognize that value remains.5
Risks to the thesis are multi-fold and include the potential for a prolonged global recession that weighs on
musical instrument sales over the next several years. This risk is mitigated by the subdued projections, which
contemplate only a modest recovery from a very low revenues base. A second risk is my lack of familiarity with
Japanese filings, obtaining original financial statements, and regulatory differences between United States and
Japanese accounting. My analysis is significantly limited to secondary sources because of this, though with partial
confirmation through comparing results to Roland DG’s (wholly consolidated subsidiary) annual reports. While
financial results appear representative, and indeed the most recent annual report is available for the parent company
4
5
http://www.taiyofunds.com/PressRelease.aspx?id=20060718b (increased position).
http://www.rolanddg.com/ir_e/holders.html (list of holders, current as of September 2009).
7
Roland Corporation – David Adamse
Roland Corporation (and therefore I have been able to confirm the financials utilized in my analysis), the lack of
detail remains a risk. Supplier defaults may be a risk, given the tightening of credit policies that Roland appears
subject to. Alternatively, this tighter payment schedule may suggest that suppliers are privy to information that is
not captured through a cash flow or balance sheet analysis. This risk is mitigated by the very substantial cash
balances that Roland Corporation holds and the lack of significant true debt. Finally, there is currency-related
export risk relating to Japanese-made products (two-thirds of Roland Corporation’s assets are located in Japan), with
an appreciated Yen compounding competitive challenges.
These risks may be transitory in nature, and look
overcompensated for by the market, supporting the view that the market is placing too great a discount on Roland
Corporation due to its exposure to the consumer, industrial discretionary spending and currency/export issues.
Conclusion
I recommend purchasing Roland Corporation shares at the current market price (which has ranged from
¥763–¥951 per share since the start of 2010). On the basis of multiple approaches to its valuation it appears to be
significantly undervalued by the market. The risks are mitigated by a significant percentage of its asset value
consisting of cash, and the bulk of its “debt” consisting of minority interest (and therefore without the legal ability to
cause a default). The investment is not based upon any franchise value in either of the two primary segments,
though it is apparent that the musical instruments segment may be depressing the valuation multiple applied by the
market on the peripherals business. Rather, the recommendation is based upon a fundamental disconnect between
the various conservative estimates of asset and earnings value and the market value of equity, likely due to the
disfavored exposure to discretionary consumer spending and business capital investment.
It is also worth noting here an alternative means of expressing much of the sentiment in this analysis.
Because Roland DG, the subsidiary (and the company held directly by the Taiyo Fund), is publicly traded, we can
separate the value placed by the market on the Roland DG peripherals business. At a current market price of
¥22.8bn for Roland DG, Roland Corporation’s 40% stake is worth approximately ¥9.12bn, excluding any premium
assumed for their controlling position, with the market value of the instruments business implied at something under
¥14bn. Using a normalized operating earnings for both segments puts the pre-tax operating earnings multiple at
approximately 3.8x for the peripherals business (22.8/6) and, at most, 5.4x for the musical instruments business
(14/2.6). Adjusting for the higher capital expenditures share of the peripherals business, however, suggests that on a
cash flow metric the two segments have a very similar implied cash multiple. The shares of Roland DG and Roland
Corporation have traded in relative unison. Given the similar cost of acquiring the cash flow (based on this implied
valuation analysis), there is more value-per-dollar provided through the growth of the peripherals business, relative
to cost. However, the musical instruments business contains the great majority of assets (64%), making the decision
one of earnings value versus assets value. Because of the ambiguity of the control premium implied for Roland
Corporation on Roland DG, the tradeoff in assets versus earnings, and the significant disdain for a consumersoriented business like musical instruments, the preferred approach is to purchase Roland Corporation. Furthermore,
it is likely to receive less attention because of its listing on the Osaka Securities Exchange (Roland DG is listed on
the Tokyo exchange, roughly twenty times to OSE in terms of size).
8
Roland Corporation – David Adamse
Exhibit 1: Adjusted Net Asset Value
Balance Sheet
Adjustments to B/S items
2004
¥20,507
291
9,475
15,998
1,738
2,695
¥50,705
2005
¥20,416
246
10,722
16,893
1,558
3,722
¥53,557
2006
¥22,414
366
12,525
21,102
2,427
3,688
¥62,523
2007
¥19,555
1,056
13,510
23,672
2,882
4,297
¥64,972
2008 2009 LTM
¥22,951
¥19,462
134
1,105
9,788
9,441
22,864
21,321
2,345
0
5,329
5,417
¥63,411
¥56,745
PPE (Gross)
36,337
Less: Accumulated Depreciation -20,487
Net PPE
15,850
Long-term Investments
3,582
Goodwill
314
Other Intangibles
1,224
Loans Receivable Long-Term
408
Deferred Tax Assets, LT
140
Other Long-Term Assets
2,893
Total LT Assets
¥24,411
39,570
-21,931
17,639
4,573
274
1,161
578
189
3,768
¥28,182
41,179
-23,349
17,830
4,665
415
1,391
1,041
766
4,485
¥30,594
43,642
-24,331
19,311
5,971
393
2,162
862
990
4,032
¥33,721
42,634
-23,673
18,962
4,303
211
1,907
1,134
1,027
2,932
¥30,476
43,453
-24,717
18,737
3,147
525
1,766
0
0
5,807
¥29,982
Total Assets
¥75,117
¥81,738
¥93,117
¥98,692
¥93,886
4,806
1,193
946
57
4,478
1,344
953
137
5,567
1,575
1,581
141
6,257
1,615
380
140
Cash
ST Investments
A/R
Inventory
Deferred Tax Assets
Other
Total Current Assets
Accounts Payable
Accrued Exp.
Short-term Borrowings
Curr. Port. of LT Debt
Curr. Port. of Cap. Leases Curr. Income Taxes Payable
Def. Tax Liability, Curr.
Other Current Liabilities
Total Current Liabilities
1,779
8
2,965
¥11,754
1,194
15
3,604
¥11,725
2,373
7
5,393
¥16,637
2,126
5
6,384
¥16,907
3,416
1,185
9,512
69
22
301
2
5,013
¥19,520
Long-Term Debt
349
Capital Leases
0
Minority Interest
11,828
Pension & Other Post-Retire. Benefits 506
Def. Tax Liability, Non-Curr.
255
Other Non-Current Liabilities
1,102
Total Liabilities
¥25,794
NAV
¥49,323
377
0
13,915
56
681
1,459
¥28,213
¥53,525
220
0
15,944
0
1,130
1,798
¥35,729
¥57,387
34
0
18,757
0
1,187
1,876
¥38,759
¥59,933
5
110
17,309
0
722
2,030
¥39,696
¥54,191
-
-
-
Adjusted Amounts
0
0
445 4.5% allowance
-1,000 to reflect discounting
0
0
-555
19,462
1,105
9,886
20,321
0
5,417
56,190
-1,050 reflect MV of land
0
-525 eliminate GW
-1,766 eliminate Other Intang.
0
-3,341
17,687
3,147
0
0
0
0
5,807
26,641
¥86,727
-3,896
82,831
2,000
1,076
5,142
59
0
388
0
5,104
¥13,769
0
0
0
0
0
0
0
0
0
2,000
1,076
5,142
59
0
388
0
5,104
13,769
5
0
16,845
0
549
2,495
¥33,662
¥53,065
0
0
0
0
0
0
5
0
16,845
0
549
2,495
33,662
¥49,169
Adjusted Net Asset Value:
9
Roland Corporation – David Adamse
Exhibit 2: Earnings Power Value
Income Statement
2004
¥75,906
44,397
58.5%
31,509
41.5%
2005
¥89,274
51,273
57.4%
38,001
42.6%
2006
¥95,259
54,398
57.1%
40,862
42.9%
2007
¥108,560
60,615
55.8%
47,945
44.2%
24,649
32.5%
140
24,789
32.7%
6,720
8.9%
29,534
33.1%
92
29,626
33.2%
8,375
9.4%
30,892
32.4%
126
31,018
32.6%
9,844
10.3%
34,560
31.8%
15
34,575
31.8%
13,370
12.3%
35,108
34.9%
240
35,348
35.2%
7,449
7.4%
31,647
38.2%
142
31,790
38.4%
972
1.2%
124
266
-142
324
259
65
177
454
-277
220
638
-418
201
542
-341
270
357
-87
Affiliate Income / Losses
Currency Gains / Losses
Other
Total Other Earnings / Losses
149
37
266
452
75
339
305
719
173
146
163
482
183
-752
-91
-661
17
-1,230
-509
-1,721
34
-1,373
-359
-1,698
Extraordinary Gains / Losses
-192
42
-288
-49
-901
-357
EBT
% Revenue
¥7,123
9.4%
¥9,071
10.2%
¥10,316
10.8%
¥13,078
12.0%
¥5,168
5.1%
-¥997
-1.2%
Taxes
% Tax Rate
Minority Interest in Earnings
% of EBIT
Net Income
2,990
42.0%
-1,734
25.8%
¥2,398
3,617
39.9%
-2,246
26.8%
¥3,208
3,830
37.1%
-2,784
28.3%
¥3,701
5,896
45.1%
-3,561
26.6%
¥3,621
2,090
40.4%
-2,031
27.3%
¥1,047
1,170
39.8%
-4
-¥2,171
Tax rate
Interest * (1-T)
NOPAT
42.0%
-83
¥2,316
39.9%
39
¥3,247
37.1%
-174
¥3,527
45.1%
-229
¥3,392
40.4%
-203
¥844
39.8%
-52
-¥2,223
Depreciation & Amortization
% of Revenues
Capital Expenditures
% of Revenues
2,133
2.8%
-2,533
3.3%
2,566
2.9%
-3,147
3.5%
2,652
2.8%
-2,418
2.5%
3,141
2.9%
-3,987
3.7%
3,321
3.3%
-3,042
3.0%
3,203
3.9%
-2,073
2.5%
EBITDA
¥8,853
¥10,940
¥12,496
¥16,511
¥10,770
¥4,175
Revenue
COGS
% of Revenues
Gross Profit
% Gross Margin
SG&A
% of Revenues
Provision for bad debts
Total Operating Expenses
% of Revenues
EBIT
% EBIT Margin
Interest Expense
Interest Income
Net Interest Expense
2008 2009 LTM
¥100,507
¥82,870
57,710
50,109
57.4%
60.5%
42,797
32,761
42.6%
39.5%
EPV Calculation
Normalized Revenue
EBIT Margin
¥82,870 conservative, last data point
9.66% average of recent 5 years, excluding LTM
EBIT
Taxes (%)
Taxes Paid
¥8,004 at EBIT margin above
39.8% statutory rate
¥3,186 at statutory rate
Net Income
¥4,819
Minority Int. Exp. (%)
Minority Int. Exp.
27% average 5-year minority interest expense
¥2,158 average amount of minority interest accounted
Net Debt Calculation
Debt
Minority Interest
Less: Cash + ST Inv.
Net Debt
Cost of Capital
EPV
Less: Net Debt
EPV of Equity
¥5 Most recent quarter debt
¥16,845 Most recent minority interest balance
-¥20,567
-¥3,718
10%
12%
¥48,187
-¥3,718
¥51,905
¥40,156
-¥3,718
¥43,874
10
Roland Corporation – David Adamse
Exhibit 3: Discounted Cash Flow Value
Key Assumptions
Taxes
Growth
39.80%
6%
Note: All figures are in millions of Yen, except per share figures
2004
2005
2006
Revenues
¥75,906
¥89,274
¥95,259
COGS (%)
58.5%
57.4%
57.1%
COGS
44,397
51,273
54,398
Oper. Exp. (%)
32.7%
33.2%
32.6%
Oper. Exp
24,789
29,626
31,018
Depreciation (%)
Depreciation
Capex (%)
Capex
EBIT
Add: Depreciation
Less: Capex
Less: Taxes
Less: Chng. In NWC
2007
¥108,560
55.8%
60,615
31.8%
34,575
2008
¥100,507
57.4%
57,710
35.2%
35,348
2009LTM
¥82,870
60.5%
50,109
38.4%
31,790
1
2010
¥77,500
57.9%
44,878
41.0%
31,790
2
2011
¥82,150
58.6%
48,138
35.1%
28,856
3
2012
¥87,079
59.0%
51,368
35.1%
30,588
4
2013
¥92,304
58.5%
53,996
35.1%
32,423
5
2014
¥97,842
58.7%
57,429
35.1%
34,368
6
2015
¥103,712
58.7%
60,908
35.1%
36,430
7
2016
¥109,935
58.6%
64,467
35.1%
38,616
8
2017
¥116,531
58.7%
68,390
35.1%
40,933
9
2018
¥123,523
58.7%
72,490
35.1%
43,389
10
2019
¥130,935
58.7%
76,821
35.1%
45,993
2.8%
2,133
3.3%
2,533
2.9%
2,566
3.5%
3,147
2.8%
2,652
2.5%
2,418
2.9%
3,141
3.7%
3,987
3.3%
3,321
3.0%
3,042
3.9%
3,203
2.5%
2,073
3.4%
2,600
3.1%
2,377
3.5%
2,882
2.9%
2,353
3.6%
3,114
2.8%
2,448
3.5%
3,212
2.9%
2,690
3.5%
3,445
2.9%
2,801
3.5%
3,656
2.9%
2,969
3.5%
3,857
2.9%
3,166
3.5%
4,100
2.9%
3,343
3.5%
4,345
2.9%
3,546
3.5%
4,602
2.9%
3,762
¥6,720
2,133
-2,533
-2,675
¥8,375
2,566
-3,147
-3,333
-3,104
¥9,844
2,652
-2,418
-3,918
-2,568
¥13,370
3,141
-3,987
-5,321
-3,146
¥7,449
3,321
-3,042
-2,965
-2,434
¥972
3,203
-2,073
-387
2,798
¥832
2,600
-2,377
-331
4,283
¥5,156
2,882
-2,353
-2,052
-784
¥5,123
3,114
-2,448
-2,039
-147
¥5,885
3,212
-2,690
-2,342
-585
¥6,045
3,445
-2,801
-2,406
-1,543
¥6,374
3,656
-2,969
-2,537
-1,592
¥6,852
3,857
-3,166
-2,727
-1,652
¥7,208
4,100
-3,343
-2,869
-1,793
¥7,644
4,345
-3,546
-3,042
-1,885
¥8,121
4,602
-3,762
-3,232
-1,993
¥5,007
¥4,552
¥2,849
¥2,354
¥3,603
¥2,707
¥3,479
¥2,376
¥2,739
¥1,701
¥2,932
¥1,655
¥3,164
¥1,623
¥3,303
¥1,541
¥3,516
¥1,491
¥3,736
¥1,440
FCF
PV FCF
¥21,441
44% of Enterprise Value
TV
PV of TV
¥62,260
¥24,004
53% of Enterprise Value
PV of FCF
Less: Net Debt
Value to Equity
¥45,445
-¥3,718
¥49,162
Cost of Capital
Terminal G
10.00%
4.00%
Working Capital Calculations
Historical and Projections of Key Measures
Oth. CA (% Rev)
5.84%
Oth. CL (% Rev)
7.83%
Days Receivable
45.6
Days Payable
39.5
Inventory Days
131.5
5.91%
6.90%
43.8
31.9
120.3
6.42%
9.81%
48.0
37.4
141.6
6.61%
9.33%
45.4
37.7
142.5
7.63%
6.47%
35.5
21.6
144.6
6.54%
7.93%
41.6
14.6
155.3
6.48%
7.93%
41.6
18.0
145.0
6.48%
7.93%
45.0
25.0
140.0
6.48%
7.93%
45.0
30.0
135.0
6.48%
7.93%
45.0
35.0
135.0
6.48%
7.93%
45.0
35.0
135.0
6.48%
7.93%
45.0
35.0
135.0
6.48%
7.93%
45.0
35.0
135.0
6.48%
7.93%
45.0
35.0
135.0
6.48%
7.93%
45.0
35.0
135.0
6.48%
7.93%
45.0
35.0
135.0
Projected Assets
Oth. Current Assets
Oth. Current Liabilities
A/R
Inventory
Other Current Assets
4,433
5,945
9,475
15,998
4,433
5,280
6,158
10,722
16,893
5,280
6,116
9,348
12,525
21,102
6,116
7,178
10,130
13,510
23,672
7,178
7,673
6,501
9,788
22,864
7,673
5,417
6,568
9,441
21,321
5,417
5,025
6,142
8,829
17,828
5,025
5,327
6,511
10,128
18,464
5,327
5,647
6,901
10,736
18,999
5,647
5,985
7,315
11,380
19,971
5,985
6,344
7,754
12,063
21,241
6,344
6,725
8,219
12,786
22,528
6,725
7,129
8,713
13,554
23,844
7,129
7,556
9,235
14,367
25,295
7,556
8,010
9,789
15,229
26,811
8,010
8,490
10,377
16,143
28,413
8,490
4,806
5,945
4,478
6,158
5,567
9,348
6,257
10,130
3,416
6,501
2,000
6,568
2,213
6,142
3,297
6,511
4,222
6,901
5,178
7,315
5,507
7,754
5,841
8,219
6,182
8,713
6,558
9,235
6,951
9,789
7,366
10,377
19,156
22,260
-3,104
24,828
-2,568
27,974
-3,146
30,408
-2,434
27,610
2,798
23,328
4,283
24,111
-784
24,258
-147
24,843
-585
26,387
-1,543
27,979
-1,592
29,632
-1,652
31,425
-1,793
33,310
-1,885
35,303
-1,993
¥49,162
8%
9%
10%
11%
12%
3%
¥61,651
52369
45733
40752
36874
Terminal G
4%
¥70,302
57628
49162
43102
38545
5%
¥84,722
65518
53963
46234
40693
Projected Liabilities
A/P
Other Current Liabilities
NWC
Chng in NWC
Valuation Matrix
WACC
11
Roland Corporation – David Adamse
Exhibit 4: Common Size Balance Sheet (% of revenues) & Key Ratios
Common Size Balance Sheet
2004
2005
2006
2007
0.4%
12.5%
21.1%
2.3%
3.6%
66.8%
0.3%
12.0%
18.9%
1.7%
4.2%
60.0%
0.4%
13.1%
22.2%
2.5%
3.9%
65.6%
1.0%
12.4%
21.8%
2.7%
4.0%
59.8%
0.1%
9.7%
22.7%
2.3%
5.3%
63.1%
1.3%
11.4%
25.7%
0.0%
6.5%
68.5%
0.4%
12.0%
21.3%
2.3%
4.2%
63.1%
PP E (Gross)
Less: Acc um ulated Depreciation
20.9%
Net P PE
4.7%
Long-term Investm ents
0.4%
Goodwill
1.6%
Other Intangibles
0.5%
Loans Receivable Long-Term
0.2%
Deferred Tax Assets , LT
3.8%
Other Long-Term A ssets
Total LT Assets
32.2%
19.8%
5.1%
0.3%
1.3%
0.6%
0.2%
4.2%
31.6%
18.7%
4.9%
0.4%
1.5%
1.1%
0.8%
4.7%
32.1%
17.8%
5.5%
0.4%
2.0%
0.8%
0.9%
3.7%
31.1%
18.9%
4.3%
0.2%
1.9%
1.1%
1.0%
2.9%
30.3%
22.6%
3.8%
0.6%
2.1%
0.0%
0.0%
7.0%
36.2%
19.2%
4.9%
0.3%
1.7%
0.8%
0.6%
3.9%
31.4%
Total Assets
99.0%
91.6%
97.8%
90.9%
93.4%
104.7%
94.5%
6.3%
1.6%
1.2%
0.1%
5.0%
1.5%
1.1%
0.2%
5.8%
1.7%
1.7%
0.1%
5.8%
1.5%
0.3%
0.1%
2.3%
0.0%
3.9%
15.5%
1.3%
0.0%
4.0%
13.1%
2.5%
0.0%
5.7%
17.5%
2.0%
0.0%
5.9%
15.6%
3.4%
1.2%
9.5%
0.1%
0.0%
0.3%
0.0%
5.0%
19.4%
2.4%
1.3%
6.2%
0.1%
0.0%
0.5%
0.0%
6.2%
16.6%
5.3%
1.5%
2.8%
0.1%
0.0%
1.7%
0.0%
4.9%
16.2%
0.5%
Long-Term Debt
0.0%
Capital Leas es
15.6%
Minority Interest
Pension & Other Pos t-Retire. Benefits0.7%
0.3%
Def. Tax Liability, Non-Curr.
1.5%
Other Non-Current Liabilities
34.0%
Total Liabilities
0.4%
0.0%
15.6%
0.1%
0.8%
1.6%
31.6%
0.2%
0.0%
16.7%
0.0%
1.2%
1.9%
37.5%
0.0%
0.0%
17.3%
0.0%
1.1%
1.7%
35.7%
0.0%
0.1%
17.2%
0.0%
0.7%
2.0%
39.5%
0.0%
0.0%
20.3%
0.0%
0.7%
3.0%
40.6%
0.2%
0.0%
16.5%
0.1%
0.8%
1.7%
35.7%
43.8
31.9
120.3
3.0
48.0
37.4
141.6
2.6
45.4
37.7
142.5
2.6
35.5
21.6
144.6
2.5
41.6
14.6
155.3
2.4
43.7
33.6
136.1
2.7
Cash
ST Investments
A/R
Inventory
Deferred Tax Assets
Other
Total Current Assets
Ac counts Payable
Ac crued Exp.
Short-term Borrowings
Curr. P ort. of LT Debt
Curr. P ort. of Cap. Leases
Curr. Incom e Taxes Payable
Def. Tax Liability, Curr.
Other Current Liabilities
Total Current Liabilities
Ratios
Days Receivable
Days Payable
Avg. Inventory Days
Inventory Turns
45.6
39.5
131.5
2.8
2008 2009 L TM
Avg. X2009
12
Roland Corporation – David Adamse
Exhibit 5: Operating Performance and Valuation Summary
Operating Performance Analysis
Operating Cash @ 1% of sales
Operating WC assets
Operating WC liabs
Net Operating WC
2004
¥759
29,907
10,751
19,915
2005
¥893
32,895
10,635
23,153
2006
¥953
39,743
14,915
25,780
2007
¥1,086
44,361
16,387
29,060
2008 2009 LTM
¥1,005
¥829
40,325
36,178
9,917
8,568
31,413
28,439
Net LT Assets
Net Assets
22,548
42,463
25,985
49,138
27,666
53,446
30,658
59,718
27,724
59,137
26,938
55,377
Net Debt
SH Equity
Net Capital
-6,860
49,323
42,463
-4,387
53,525
49,138
-3,941
57,387
53,446
-215
59,933
59,718
4,815
54,191
59,006
2,312
53,065
55,377
Performance Metrics
ROE
Operating ROA
EBIT/Interest Coverage
EBITDA/Interest Coverage
4.86%
5.45%
54.4
71.6
5.99%
6.61%
25.9
33.8
6.45%
6.60%
55.7
70.7
6.04%
5.68%
60.8
75.1
1.93%
1.43%
37.1
53.6
-4.09%
-4.01%
3.6
15.5
Comparison of Valuations
Earnings Power Value
Adjusted Asset Value
Market Equity Value
Shares O/S
EPV / AAV
Margins of Safety:
EPV-based
Asset Value-based
Net Cash in EPV valuation
Cash % of Market Value
Total Mkt Value
¥51,905
¥49,169
¥22,973
25.10
Per-Share
¥2,068
¥1,959
¥915
Comparison Trading Statistics
(% of)
5Y high
3Y high
1Y high
57.8%
61.0%
168.1%
54.7%
57.8%
159.3%
25.6%
27.0%
74.4%
Reference:
1 year
3 years
5 years
Highs
¥1,230
¥3,390
¥3,580
105.6% suggests roughly at par with asset value
55.7%
53.3%
$3,718 (cash - debt - minority interest)
16.2%
13
Roland Corporation – David Adamse
Exhibit 6: Comparables & Multiples-Based Valuation
Comparables
TEV/
TEV/
Total Revenues
LTM EBITDA LTM
TEV/
EBIT LTM
P/
Diluted EPS
Before Extra
LTM
P/
TangBV LTM
Instruments
Harman International Industries Inc.
Kawai Musical Instruments Mfg. Co. Ltd.
Yamaha Corp.
1.0x
0.3x
0.5x
27.0x
5.8x
11.0x
NM
14.6x
95.9x
NM
43.0x
NM
3.2x
1.4x
0.9x
Average
0.6x
14.6x
55.2x
43.0x
1.8x
Peripherals
3D Systems Corp.
Stratasys Inc.
2.9x
5.3x
57.3x
34.7x
NM
78.4x
NM
139.8x
6.7x
4.8x
Average
4.1x
46.0x
78.4x
139.8x
5.7x
Roland Corp
0.3x
9.9x
NM
NM
0.5x
2006
24.34x
26.42x
5.42x
2.00x
Normalized Forecast Period
2011E
2012E
2,849
3,603
18.37x
18.37x
52,322
66,182
-3,718
-3,718
56,040
69,899
44,675
49,753
2007
16.95x
18.24x
2.79x
3.00x
2008
13.82x
13.44x
3.21x
2009
4.06x
4.06x
7.22x
4.00x
5.00x
Roland Historical Multiples
2005
NA
NA
5.64x
TEV/LTM Unlevered FCF
Market Cap/LTM Levered FCF
TEV/LTM EBITDA
Valuation Unlev. FCF-based
Unlev. FCF
Multiple
EV
Net Debt
Equity
PV @ 12%
TEV/LTM EBITDA
EV @ 5x
Equity Value
EBITDA
5.0x
PV @ 12%
8,038
40,188
43,906
35,002
8,237
41,184
44,902
31,961
Avg X2009
18.37x
19.37x
4.27x
2012E
3,479
18.37x
63,906
-3,718
67,623
42,976
9,096
45,481
49,199
31,267
Multiples-Based Valuation
Normalized FCF
Multiple
Enterprise Value
Net Debt (current)
Equity Value
3,310 average of 2011E - 2012E
15.0x average of 2006 - 2008 historical, minus 300 bps to account for inflated market
49,654
-3,718
¥53,372
Normalized EBITDA
Multiplle
Enterprise Value
Net Debt (current)
Equity Value
8,457 average of 2011E - 2012E
4.5x
38,056
-3,718
¥41,774
Note: 2010 is forecast as transition year with directional shift in working capital trend and continued cyclically depressed earnings.
It is therefore excluded from the normalized estimates of EBITDA and FCF as it would understate the former and overstate the latter.
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