NOF Corporation was established in 1937 and is headquartered in Shibuya-ku, Tokyo. It is a Japanese company primarily engaged in the functional chemical products business, life science business, and other sectors. It specializes in the manufacture and sale of fatty acids, fatty acid derivatives, surfactants, ethylene oxide and propylene oxide derivatives, organic peroxides, petroleum chemicals, functional polymers, functional films, electronic materials, and special rust prevention agents, as well as rust prevention processing.

In addition, the company produces and sells drug formulation materials for drug delivery systems (DDSs), edible oils and fats, health food products, industrial explosives, defense-related items, and space-related products. The company also operates in the transportation and real estate businesses.

The company has over 3,800 employees and mainly operates through three segments. The Functional Chemicals segment, which generated 63% of sales in FY 24; the Pharmaceuticals, Medicals, and Health segment, contributing 20%; and the Explosives & Propulsion segment, accounting for 16%. Other Services added 1% to the revenue. Geographically, the company's sales distribution is as follows: Japan accounts for 67%, Asia for 16%, Europe for 10%, and other regions for 7%.

Expansion into new business domains

The company expects its operating profit to increase from JPY45.3bn in FY 24 to JPY60bn in FY 30, as it advances into new business domains. In the DDS business, the company plans to develop new products targeting high-growth potential modalities. It aims to foster new technology development by expanding collaborations with external research institutes. The number of research staff members is expected to rise significantly, with an index number taking FY 19 as 100, projected to reach 173 by FY 30. The sales plan for raw materials used in DDS drug formulations is expected to achieve a CAGR of over 10% from FY 19 to FY 30.

Consistent cash generation

NOF Corporation posted a decent revenue CAGR of 7.3% over FY 21-24, reaching JPY238.3bn, driven by strong demand for cosmetics-related products. Operating income outpaced revenue growth significantly, with a CAGR of 8.4% over the same period, reaching JPY45.3bn, along with a 57bp increase in margins to 19%. Net income therefore rose at a CAGR of 11.5% to JPY37bn in FY 24, with margins expanding by 170bp to 15.5%.

Net profit growth has helped the company to generate consistent positive cash from operations over the same period, rising from JPY27.4bn in FY 21 to JPY29bn in FY 24. This led to increase in ROE from 12.6% to 13.4% in FY 24.

In comparison, Toray Industries, Inc., the company’s local peer, grew with a revenue CAGR of 4.8% over the past three years, reaching JPY2,563.3bn in FY 24. Operating income dropped at a CAGR of minus 1.2% to JPY127.5bn in FY 24. Net income also decreased with a CAGR of minus 2.6% to JPY77.9bn in FY 24.

Impressive stock performance

Over the past year, the company's stock has delivered remarkable returns of approximately 31%, implying strong long-term performance. In comparison, Toray Industries’ stock has delivered returns of about 25.2% over the same period. Management declared dividends of JPY45 per share in FY 24, reflecting a yield of 2.2%. Moreover, analysts forecast an average yield of 1.7% over the next two years, signaling the company’s focus on rewarding its shareholders.

NOF Corporation is currently trading at a P/E of 16.8x, based on the FY 25 estimated EPS of PHP159.6, which is higher than its 3-year historical average of 14.2x and Toray Industries’ valuation of 15.1x. In terms of EV/EBIT, the company is currently trading at 11.5x, which is higher than its 3-year historical average of 9.5x but lower than Toray Industries (13.3x).

NOF Corporation is generally liked by three analysts, with two having ‘Buy’ ratings and one having ‘Outperform’ rating for an average target price of JPY2,933.3, implying decent upside potential of 9.6% from the current price. Their views are further supported by an anticipated revenue CAGR of 7.5% over FY 24-26, reaching JPY275.6bn. EBIT CAGR of 17.7% to JPY73.8bn, with a margin of 19% in FY 26. In addition, analysts estimate a net profit CAGR of 3.7%, reaching JPY39.3bn, with EPS expected to increase to JPY174.4 in FY 26 from JPY153.9 in FY 24. Likewise, analysts estimate an EBIT CAGR of 11.8% and a net profit CAGR of 24.9% for Toray Industries.

Overall, NOF Corporation has demonstrated strong financial performance and growth, driven by strategic advancements into new business domains and consistent cash generation. The company's stock has delivered impressive returns, outperforming its local peer, Toray Industries. With favorable analyst ratings and a focus on rewarding shareholders through dividends, NOF Corporation is well-positioned for continued success.

However, it is prone to some risks, including technology leaks, raw material procurement issues, occupational safety hazards, intellectual property infringements, and regulatory compliance challenges. To mitigate these, the company has implemented strict management rules, ongoing training, supplier surveys, safety assessments, and robust compliance controls.