Japan succession crisis fuels elevator empire 6,000% stock gain

[NEW YORK] Tucked away in Japan’s vast corporate landscape is a little-known elevator maintenance company which has built an empire by buying up heirless family-run companies.

Japan Elevator Service (JES) has turned the consolidation of small, nuts-and-bolts businesses into a stock market powerhouse that has surged nearly 6,000 per cent since its modest 1.8 billion yen (roughly S$20 million at that time) initial public offering (IPO) in 2017. Since listing, the company has announced acquisitions of 21 companies. It is among the Topix index’s top performers since its debut with a market capitalisation of around 372 billion yen (S$3.2 billion).

Key to JES’s expansion plan has been looking for domestic lift maintenance companies that lack a clear succession plan and acquiring them, said Ikuo Mitsui, a fund manager at Aizawa Securities Group, who bought shares in the IPO. This has allowed it to pursue a growth strategy with a stable revenue base, he said.

Japan is facing one of the world’s worst population crises, with among the lowest birth rates in the developed world as people delay marriage and childbirth. The lack of children has affected family businesses who find there is no one to take over operations when the founder retires or dies.

Take the company’s latest acquisition. When the president of Showa Yusoki Tohoku died without an heir, the company, which is based 360 kilometres north of Tokyo in Sendai, Miyagi Prefecture, reached out directly, JES said, adding that the expansion of its client base was also a reason for the acquisition.

More than half of Japan’s 270,000 companies lacked succession plans last year, according to a Teikoku Databank report. The leadership vacuum triggered more than 500 bankruptcies that fiscal year, hitting construction, manufacturing and services sectors hardest, a separate report from the research firm showed.

Katsushi Ishida, who founded Japan Elevator in 1994 and holds a more than 20 per cent stake, has taken advantage of these demographic headwinds to increase the value of his company. The acquisition strategy has helped more than double the company’s share of Japan’s elevator maintenance market to 10 per cent over the last six years. Sales grew 17 per cent for the year to March, placing it in the top quintile among Topix members.

Ageing infrastructure

Investors and analysts remain optimistic that the 59-year-old entrepreneur can keep unearthing takeover targets in Japan’s greying business landscape while winning hotly-contested maintenance contracts as the country’s infrastructure ages. Ishida declined to comment for this story.

The company could achieve a market share of 20 per cent, said Dariusz Czoch, senior portfolio manager at Federated Hermes Inc., a holder of the stock, without giving a timeline on when this might be met.  JES forecasts its share of the Japanese domestic elevator maintenance market will rise to 13 per cent in fiscal year 2027.

The “big build-up of elevators took place in Japan over 20 years ago; this creates a good market for service and modernisation”, Czoch said.

Many elevator systems built during Japan’s construction boom are nearing the end of their operational lives, meaning more business for elevator renovations. The company expects sales for modernising and refurbishing elevators to increase nearly 20 per cent this fiscal year from a year earlier, making it a key pillar in its goal for more than US$400 million revenue in fiscal 2027.

With its operations concentrated inside Japan, the company has been largely shielded from effects of US President Donald Trump’s protectionist trade threats.

The stock has been one of the big winners over the past few months, with shares surging 48 per cent since Trump declared “Liberation Day” on Apr 2. The gain is more than five times the return of the Topix Small Cap Index and far outpaces the 6.1 per cent rise in the broader Topix over the same period.

All five analysts that cover the stock recommend shares to their clients and they have an average price target that implies the stock could rally another 11 per cent from Thursday’s close.

That said, the recent increase in market capitalisation may diminish JES’s appeal for value investors. Shares now trade at an estimated forward price-to-earnings ratio of roughly 50, about double that of peer Fujitec.

Rich valuation

“The valuation is incredibly rich,” said Tim Morse, an analyst at Asymmetric Advisors, who has maintained a positive rating on the stock since launching coverage three months ago. High valuations ramp up the pressure on JES’s management team to continue to expand its market share and sales to appease new investors, he said.

“With a high valuation, there is less tolerance for any earnings disappointment,” Morse said. “But what I believe investors like here is that there is a clearly defined strategy that is proven.” The company is due to release its first quarter earnings results on Aug 8.

And then there is Japan’s overall economic outlook which has been the big question for some time.

“I think there will be a phase at some point where growth begins to slow down, but at the moment it’s still stable and going,” said Hisashi Arakawa, director and the head of equities at abrdn Japan. “There aren’t many domestic demand-oriented stocks capable of maintaining high returns with stable growth prospects over the next two to three years.” BLOOMBERG