Additionally, the company now estimates operating profit of JPY28bn (up from the original JPY23bn and 1QFY25:JPY24.5bn), with margins of 17.0%, up from the original guidance of 14.8% and 1QFY25 guidance of 15.3%. This optimistic outlook is driven by the anticipated sales growth in its plant division, particularly from large-scale semiconductor projects overseas, including Taiwan and China. Furthermore, the Service Solutions segment is expected to see a robust growth, with expanded sales in facility-owned services, maintenance, consumable replacement, and facility modifications. Organo now projects a ROE of 19.6% for FY25, up from the original guidance of 15.0%.

Founded in 1946 and headquartered in Tokyo, Japan, Organo is a leader in water treatment engineering and functional products. The company operates through two primary segments: Water Treatment Engineering (83% of 1HFY25), which includes solutions for ultrapure water, wastewater management, and maintenance services and Performance Products (17%), which provide water treatment chemicals and materials for advanced industrial applications. Organo also has a strong geographical presence with 60% of its revenue coming from Japan and 40% from international markets, particularly in Taiwan and China.

Semiconductor market to drive long-term goals

The expansion of AI and EVs is expected to aid the growth rate in the semiconductor market, which is projected to grow at a CAGR of over 8% until 2030 (WSTS estimates), reaching around JPY900bn, up from approximately JPY500bn in 2023. To drive this growth, the company plans to capitalize on the growing demand in the semiconductor industry by targeting large-scale projects in Japan and abroad while strengthening its presence in key regions like the United States, Taiwan, and Southeast Asia. Expanding its high-margin Service Solutions business, including facility-owned contracts and advanced digital services, will play a pivotal role, with increasing sales of water treatment chemicals and energy-efficient products. To support this growth, Organo is also building a global engineering capacity, investing in cutting-edge technologies for water recycling and purification. Organo’s long-term plan aims to reach sales of over JPY200bn by FY30, growing at CAGR of around 5%. Additionally, the company targets operating margins of 15% or higher and ROE of over 12% by FY30.

Strong growth momentum and market outperformance

Organo demonstrated impressive financial and operational growth over the last three years, highlighting its robust business model and strategic efficiency. During this period, net sales grew from JPY101bn in FY21 to JPY150bn in FY24, achieving a CAGR of 14.3%. Similarly, EBIT showed substantial growth, rising from JPY9.6bn to JPY22.5bn, with EBIT margins improving significantly from 9.5% to 15.0%, driven by strategic cost management and a focus on high-margin projects. However, cash flows were volatile, due to working capital movement and strategic capital expenditures aimed at driving long-term growth. Consequently, net debt jumped from JPY3.2bn in FY21 to JPY18.8bn in FY24, resulting in a leverage of 0.77x in FY24, up from 0.33x in FY21.

Organo fared better compared to its peer, Ebara Jitsugyo (EBARA) and Kurita Water (KURITA), demonstrating superior revenue and operating margin performance. Over the past three years EBARAs’ revenue grew by a CAGR of 6.2% reaching JPY36.3bn in 2023, while KURITA’s revenue delivered a CAGR growth of 12.8% to JPY385bn in FY24. The operating income for EBARA and KURITA stood at JPY4.1bn and JPY41.3bn in the same period, respectively. However, operating margins remained stable for both EBARA and KURITA at 11%, compared to expansion in Organo.

Building on its consistent growth trajectory, Organo has continued to deliver strong results in 1HFY25. The company posted a revenue of JPY74bn, a 13.5% YoY growth, largely driven by the Water Treatment Engineering segment. Orders in this segment rose by an impressive 24.6%, contributing to net sales of JPY62bn, supported by strong demand for large-scale projects in Taiwan and China. EBIT also saw a significant increase, reaching JPY11.5bn, a 46.1% YoY growth, with margins expanding by 340bps reaching 15.4%. Improved FCF, supported by higher profits, enabled the repayment of JPY11bn in debt, improving the leverage to 0.29x in 1HFY25.

Rising valuation reflects positive outlook

The company share price has increased over 50% in the last one year. The sharp run-up in prices have pushed its valuation higher compared to its historical averages and peers. It is currently trading at a P/E ratio of 19x (based on the projected EPS of JPY442 for FY25), which is higher than its 10-year historical average of 14x, as well as its peers EBARA at 14x and KURITA at 18x. Additionally, the company is trading at an EV/EBIT of 15x, higher than its 10-year historical average of 10x, EBARA at 11x and KURITA at 13x. This premium valuation is justified given the consensus optimism about Organo’s outlook. Consensus estimates expect Organo’s revenue to grow at CAGR of around 7%, with margins to 18% by FY27, while they project 5% CAGR growth for EBARA and KURITA, with margins reaching 12% and 13% respectively. The three analysts covering the stock are equally split in their recommendation of “Buy”, “Outperform” and “Hold”, with average target price of JPY9,143, indicating upside potential of around 8% from current market price.

Overall, Organo presents a good investment opportunity, driven by its focus on high-margin projects, significant growth potential in key markets and a strong balance sheet. However, the investors should remain cautious about the highly competitive landscape of the water treatment industry, where numerous players offer similar solutions. Furthermore, stricter environmental regulations and varying compliance requirements across regions could pose challenges, potentially impacting Organo’s revenue streams and margins.