Paltac Corp (TYO: 8283) - Fundamental Investment Case

Japanese commodities and cosmetics company suffers from short term negative factors that have impacted 1Q earnings. The situation has created an opportunity to own Japan’s #1 wholesaler, a ruthlessly efficient one-stop shop middleman that is focused on raising automation and lowering costs

PALTAC is the largest wholesale procurer and supplier of cosmetics, daily necessities and OTC medicines in Japan, shipping the equivalent of 25 products annually for every Japanese man, woman and child.

1Q 3/20 earnings were below plan due to: inbound weakness; low sales of insecticide and other seasonal items due to cool weather; the 10 day Golden Week and store closures for the Osaka G20 summit and suppliers delaying new product releases until after the Oct 2019 consumption tax hike.

As of 2QTD the impact from Golden Week, the Osaka summit and seasonal factors have disappeared and inbound related YoY weakness is expected to level out from November, based on when the decline began in FY 3/19, and we expect pre-tax hike demand and a spate of new product releases to result in the hike proving marginally positive for PALTAC overall (as in 2014).

We also note PALTAC is assuming approximately Y1bn in one-off costs from a new distribution centre. We expect these to drop out in FY 3/21 leaving behind the positive impact on margins from increased productivity.