TOYA SA

Investment Analysis of TOYA SA

Toya in a Nutshell

Toya imports and distributes power tools and hand tools for both professionals and home users.

It operates in a market with expected growth of between 3.23% and 6.4%.

The company is growing faster than the market, achieving a CAGR of 11% since 2011.

The business is high-quality, with an average ROIC of 18%.

The company's largest shareholder is its founder, ensuring a long-term vision.

The company's value is very low, trading at 7 times the current year’s earnings with depressed margins. Normalizing margins, it trades at around 5 times earnings

Introduction to TOYA and a brief history:

The Group's core business is the import and distribution of power tools and hand tools for both professionals and home users, and to a lesser extent, professional kitchen equipment, as well as essential products for the kitchen, bathroom, and garden.

The company's origins trace back to 1990 with the establishment of TOYA IMPORT-EKSPORT S.C. However, it wasn't until 2001 that the company adopted the name TOYA SA and built a modern distribution and logistics center in Wrocław.

In 2003, as part of their brand diversification strategy, they developed the brands YATO, STHOR, VOREL, POWER UP, FALA, and FLO.

As part of their international expansion, the company began operations in Romania in 2003 and in China in 2008, establishing a subsidiary in each country. ¹ The Chinese subsidiary is of significant importance. The majority of the tools are produced in China, so in addition to conducting business there, it is also responsible for outsourcing production to Chinese subcontractors, coordinating orders and shipments to Poland and Romania, and handling export sales in Asian, African, and American markets.

In 2011, the company went public.

In 2012, they launched toya24.pl, their online store.

In 2016, they debuted in the professional gastronomy equipment industry and opened a second online store in Poland – yatogastro.com.

In 2019, they opened another warehouse in Romania and established another new subsidiary in China.

Business Model

The company's business model is easy to understand. Toya imports and distributes power and hand tools for professionals and home users, as well as kitchen, bathroom, and garden equipment, and equipment for professional catering.

1. Research and development, including brand management: Takes place at TOYA SA and is implemented by the Product Development Department, which is responsible for market analysis to identify new products, analysis of design trends, conceptual work, and product designs.

2. Manufacturing: The goods are manufactured by external manufacturing companies, mostly located in China.

3. Import and storage: TOYA imports the products and handles their storage and distribution. The company has 5 warehouses: 2 in Poland, 2 in China, and 1 in Romania.

4. Marketing and sales: Marketing and sales: Toya performs marketing activities such as catalogs, attendance at fairs, etc., and sells its products through 4 channels, wholesale market, export, retail chains, retail sales (toya24.pl - yatogastro.com).

The company sells its products through 4 distribution channels:

• Wholesale: With 44% of sales and a gross margin of 36%, this is the main sales channel. Sales are made through distributors, wholesalers, and stores.

• Export: Accounts for 34% of sales with a gross margin of 28%. This channel refers to countries where the company does not have a direct presence. Sales in Poland, Romania, and China are excluded from this segment. Ukraine has the largest export share, at 26%. The end of the war and the subsequent reconstruction of the country could significantly boost the company's sales.

• Retail chains: Representing 12% of sales and a gross margin of 31%, the company sells its products through large retail chains.

• Retail: With 10% of sales and a gross margin of 46%, the company sells its products through its two online stores, toya24.pl and yatogastro.com, as well as other online platforms. This is the company's most interesting channel. In addition to being the most profitable, it is also the fastest-growing, achieving a CAGR of 25% in recent years. Last year, the company aimed to improve this sales channel and implemented an aggressive pricing policy to be more competitive, which resulted in a growth of 62%. In the long term, we can expect this segment to gain further weight in the sales mix, which is positive for the group's margins.

Brands

Yato: This is the company's main and most successful brand, as evidenced by its increasing share of sales, from 39% in 2011 to 80% in 2024. It's a brand designed for car workshops as well as the construction, finishing, and horticulture industries. In 2016, they entered the catering business, offering equipment addressed to the HoReCa industry. The brand is primarily aimed at professionals, who typically do not buy products on Amazon. However, if we look at their products, the reviews are quite positive, and the company seems to stand out for its good value for money.

Vorel: This is the second most important brand, with 11% of sales in 2024. It offers manual and pneumatic tools necessary for workshop, construction, and home use. In 2011 and 2012, it contributed a similar percentage to sales as Yato, but over the years, due to Yato's focus on power tools, it has lost ground.

Sthor: Representing 1.91% of sales in 2024, it offers power tools for DIY users.

Lund: With 2.61% of sales, it offers multifunctional and easy-to-use household appliances.

FLO: Contributing 1.9% of sales, it offers gardening tools.

Fala: Accounting for 1.62% of sales, it offers kitchen and bathroom faucets, shower panels, and a wide selection of linear drains.

Industry Overview

The company operates in the power and hand tools market.

There is no clear consensus among analysis firms regarding the market size and growth expectations, due to the wide variety of different tools that can be included in the calculations.

Despite the lack of consensus on the exact figures, there is agreement that it is a growing industry, with most firms expecting growth rates exceeding 5% annually. The growth is mainly driven by demand in the construction, automotive, industrial, and maintenance sectors, as well as the rise of DIY (Do-It-Yourself).

According to TOYA, they consider the market to be fragmented, with the top 7 companies accounting for slightly more than half of the market. Some of the main companies are Bosch, Stanley Black & Decker, Hilti, Makita, Snap-on Incorporated, and Techtronic Industries.

At first glance, it might seem like a cyclical market dependent on new investments. However, a significant portion of their tools are used for maintenance tasks in various sectors, such as industry, construction, automotive, and households. Furthermore, products such as cutting discs, drill bits, and saw blades are consumables that require periodic replacement, generating constant demand regardless of the economic cycle. Therefore, while some demand is linked to new investments, a significant portion remains relatively stable.

The following charts show the change in revenue for Stanley Black & Decker and Makita. The worst decline for both companies occurred during the 2008 financial crisis, which makes sense given that many of their tools are linked to construction. Generally, however, revenues have trended upward, with minor drops in certain years.

Financial Analysis

Revenue

Since 2011, the company has grown at an annual CAGR of 11%, with only two years of negative growth. With most analysis firms expecting market growth exceeding 5%, a fragmented market, and the company's ability to grow above the industry average, I am optimistic that it can maintain growth above 10% in the coming years.

Gross profit and Ebitda

TOYA has demonstrated stability in its margins over the years. Currently, margins are at the lower end of their historical range due to increasing labor costs resulting from a higher number of employees and wage increases in Poland.

It is important to note that the margin deterioration is more significant than it appears when compared to historical data. Since 2019, the implementation of IFRS 16 has excluded leases from EBITDA, artificially inflating it. Adjusting for this effect, TOYA's real EBITDA margin in 2024 would be 11.8%, which is lower than the historical average of 14.3%. Therefore, a recovery of margins towards their historical average would lead to higher profit growth than revenue growth.

Net income and Free cash flow

As we can see, there is a significant difference between profit and free cash flow. As a distributor, the company's main investment is in working capital. This causes free cash flow to materialize later than net profit. In order to grow, the company must first import its products from Asia, resulting in a cash conversion cycle of over six months. In 2024, inventories increased by 56%, resulting in a significant cash outflow. Part of this increase is related to the new warehouse in China, and another part, in my opinion, is due to positive expectations for 2025. It can also be observed that in years of low or moderate growth, free cash flow exceeds net profit.

As can be seen in the following graph, if we eliminate the effect of working capital, which is mostly inventories, net profit and free cash flow are similar.

ROIC

Toya`s business is high-quality, with an average ROIC of 18%.

Balance Sheet

The company's financial position is very strong, with net cash excluding leases of 5.2 million PLN.

Management and Shareholders

Regarding management, I would highlight two individuals: Grzegorz Pinkosz and Jan Szmidt.

Grzegorz Pinkosz has been the President of the Management Board of TOYA SA since 2009. As we have seen in the financial analysis, the busines evolution and execution under his leadership have been excellent. Grzegorz has a salary of 1,169,000 PLN and holds 146,812 shares of the company. At current prices (6.47 PLN), this equates to 80% of his annual salary.

Jan Szmidt is the Vice-Chairman of the Supervisory Board and a co-founder of the company. Jan is the largest shareholder with 37.69% of the capital. Although he is not the CEO, this ensures an alignment of interests.

Another major shareholder is Romuald Szaÿagan, co-founder of TOYA.

It is worth mentioning that there was previously another significant shareholder, Tomasz Koprowski, the third founder of Toya. Over the following years, he gradually sold his stake. While the details are not public, this was due to a dispute between Tomasz, who owned 19.4% of the capital at the time, and Jan Szmidt, which even ended up in court, a dispute that Jan Szmidt appears to have won.

Capital Allocation

Regarding capital allocation, the company has a long-term vision and prioritizes growth over profit distribution. This results in an unstable dividend payout, which the market may not like, but personally, I appreciate this long-term focus, especially when the ROIC is high.

TOYA has not adopted a formal dividend policy but usually shares its profits with shareholders. Since its IPO, over the last 11 years, the company has paid out dividends 6 times and conducted a share buyback once (in 2018 from the 2017 profit).

In the last 2 years, the company has not decided to share profits with shareholders, mainly due to higher investment expenditures for the construction of a warehouse in China and economic instability resulting from the outbreak of the war in Ukraine and significant increases in interest rates.

In May 2024, Jan Szmidt proposed creating a reserve for a share buyback worth PLN 100 million.

Risks

The company's main risk is that most of its products are sourced from China. This creates foreign exchange risks, as purchases are denominated in yuan and U.S. dollars. Another risk is possible supply chain disruptions, such as those experienced during the pandemic. These risks affect the entire industry, not just Toya, as most tools are imported from China.

Trump's Tariffs:

Recently, we have seen market downturns related to Trump's threat to impose tariffs. Fortunately, Toya does not sell in the U.S., so the tariffs will not directly affect the Group's results. However, the tariffs may indirectly encourage Chinese suppliers to lower their prices for customers like Toya.

Valuation

Toya is currently trading at 7 times its 2024 earnings, despite having depressed margins. A simple normalization of margins would imply the company trading at around 5 times earnings, for a company growing at a double-digit rate with ROICs above 15%.

Based on Peers

Using the LTM P/E ratio, , we can see that the company is significantly cheaper than its peers, trading at half the average, generating a 100% upside in case of convergence.

By Historical Multiples

If we compare the current multiples with historical multiples, the company continues to show a considerable discount, ranging between 60% and 133%.

DCF

Finally, for illustrative purposes, we will use a DCF analysis with what I believe are conservative projections.

Growth: In the bull case, the company will continue to grow at double-digit rates. For the base and bear cases, we will assume market growth based on the predictions of analyst firms.

EBIT Margin: We will normalize margins, using 14% for the bull case, 13% for the base case, and 12% for the bear case. In none of our scenarios are we using peak margin levels.

Despite using a WACC of 15%, the company still trades at a discount.

Conclusion

The conclusion is simple: 7 times earnings, which with normalized margins would be around 5, is too low for a quality business with ROICs consistently above 15% and the capacity to grow at 10% annually.

disclaimer : This analysis is for informational purposes only and does not constitute investment advice. The author is not a financial advisor. Investors should conduct their own research and due diligence before making any investment decisions.