Toilet Maker's Shares Suddenly Surge — Turns Out It's Because of AI
Jakarta, CNBC Indonesia — Shares in Japanese toilet and bathroom fixtures manufacturer Toto Ltd. have suddenly become a darling of investors, with the Tokyo-listed company’s stock price rising more than 40% this year.
The surge has been driven by sentiment that Toto is involved in artificial intelligence (AI). However, the AI technology connection has nothing to do with its toilets.
One of Toto’s flagship businesses is producing advanced ceramics used by semiconductor equipment manufacturers. The business is considered highly profitable, and one of Toto’s major shareholders wants the company to focus on it even further going forward.
London-based Palliser Capital, one of Toto’s 20 largest shareholders, released a report earlier this week detailing how the company could enhance investor value by doubling down on its ceramics business.
The report, entitled “Maximising TOTO Value — The Most Underappreciated and Overlooked AI Memory Beneficiary,” outlined how Toto could do a better job by “transforming from sanitary excellence to semiconductor materials innovator.”
Palliser highlighted that Toto’s production of electrostatic chucks — ceramic components used by chip equipment companies to etch semiconductor wafers — is a highly profitable business, generating operating profit margins of 40.6% and return on assets of 34.2%. These figures are higher than comparable metrics for competitors such as Shinko, NGK, Sumitomo Osaka, and Niterra.
Nevertheless, Palliser argued that Toto shares are undervalued by approximately 55%. The firm said the company needs to improve transparency regarding the value and prospects of its ceramics business, invest more in the unit given its higher growth prospects, and improve capital efficiency by increasing sales of shares Toto holds in other companies.
Toto did not immediately comment on Palliser’s proposal. However, despite its shares having rocketed this year, Palliser believes there remains significant upside potential.
Toto shares were trading at around 6,200 yen (US$40), having surged from approximately 5,500 yen (US$35.50) following news of the plan.
Palliser argued that the stock could reach 8,800 yen (US$56.85) if the company executes its plan — a rise of more than 55% from the share price before Palliser submitted its proposal.
However, analysts are not entirely convinced. Only three of the seven analysts covering Toto rate the stock as a “Buy.”
Three other analysts have given it a “Hold” rating, whilst one analyst has rated it “Sell.” The average price target for the stock sits slightly below 4,800 yen (US$31), more than 20% below the current price.
So, whilst Palliser considers Toto a “bargain” at current levels, investors should be aware that many other experts believe one would simply be throwing money away by purchasing these shares.
Notably, Toto Ltd. has a business entity in Indonesia, namely PT Surya Toto Indonesia Tbk. (TOTO). The company is a joint venture between Toto Ltd. and CV Surya.