METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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Date:5/6/2017

S.T.CORP(4951,JP) Recommendation:OutperformExchange:TokyoStockExchange1 SharePrice:JPY1,790(5/2/2017)Sector:Deodorizersandairfresheners TargetPrice:JPY2,201MarketCap:JPY41billion P/E:18.3x(3/18CE)P/B:1.6x(3/17act) Div.Yield:1.5%(3/18CE)

HighlightMETRICALinitiatesS.T.CORPORATIONas“Outperform”onpositiveoutlookformid-term.ThebusinessreformisfinallyonrighttracksinceMs.TakakoSuzuki,presidentundertookinFY03/2014,reviewingprofitabilityofproductline-upandfocusingonhigherprofitabilityproducts.COGS/Salesimprovedto59.8%forFY03/2017from61.1%forthepreviousyearandrecurringprofitmargingainedto6.3%from3.9%forthesameperiod.Theimprovementhasjuststartedandisexpectedtokeepgoingforthemid-term,asthecompanytargetsOPmarginto10%from6.2%forFY03/2017.BeyondFY03/2020,overseasbusinesswouldbeakeyforfurthergrowth.Itsoverseassaleisonly7.3%ofthetotalsaleforFY03/2017.Thecompanyanticipatesexpandingitsairfreshenerssale,developingthedemandinrapidlyacceleratingagingsocietyinJapanandAsianneighborcountries.Onpeercomparison,S.TCORPORATION’ssharepricesharepricedoesnotlookexpensiveandseemstohaveroomforupsideonmid-termgrowthoutlook.Applying15xofEBITtothenormalizedearningsfromFY03/2012toFY03/2018(E)andaddingnetcashtothevaluation,itwouldbeapprisedtobe18%discountfromtheclosingpriceonMay2nd2017.BusinessDescriptionS.T.CorporationwasfoundedasS.T.ChemicalPlantin1946andexpandedtoairfreshenersdehumidificationagentfrominsecticidesandhome-useglovesSeethesalesbyproductandmarketsharechartonleftandbelow).

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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AIRCare(DeodorizersandAirFresheners)AIRCareproductsincludedeodorizersandairfresheners,accountingfor43%oftotalsale.Deodorizersgains79%andairfreshenersowns26%ofdomesticmarketshare.Theseproductsleadthecompany’ssalesgrowth.CLOTHCare(MothproofingAgents)CLOTHCareproductsincludemothproofingagentsthatowns50%ofdomesticmarketshare,maintaininghighprofitabilityasoneoforiginalproductssincethecompanywasfounded.THERMALCare(DisposableHeatingPad)ThermalCareproductsincludeDisposableHeatingPadthatowns17%ofdomesticmarketshareandsellsingapseasonwinter.HANDCare(Gloves)HANDCareproductsincludehome-useglovesthatowns24%ofdomesticmarketshareandsellsinoverseasmarketsuchasWal-MartstoresinU.S.HUMIDITYCare(Dehumidifiers)HUMIDITYCareproductsincludedehumidifiersthatowns38%ofdomesticmarketshareandthemarkethasbeenoriginatedbythecompany.TheproductsaresellingmainlyinrainyseasoninJune-JulyinJapan.HOMECare(CleanersandOther)HOMECareproductsincludecleanersandotherhome-useproductsaswellasnewlydevelopedproducts.IndustryOverviewandCompetitivePositioningIndustryOverviewThemarketsarelikelytoexpandatslowerrateinJapanwherethenumberofhouseholdwillbedecreasinggradually.MothproofingAgentsmarketthatS.T.gains50%marketshareremainedflatJPY5billionin2016.DisposableHeatingPadmarketthatS.T.owns2ndlargestshareof16%wasalsoflatatJPY16billion.HouseholdusegloveswasflatatJPY24billion,maintaining24%marketsharebyS.T.Only2productsegmentsuchasDeodorizers&AirFreshenersandDehumidifiersmarketsgrewslightlyby4.6%YoYand6.2%YoY.HouseholdconsumergoodsareverylikelytoslowalongsidethedecreaseinthenumberoffamilyinJapan.However,Deodorizers&AirFreshenersmarketdoesnotlookthesamecase.Thereisstillpotentialforelderlycareuse.Suchdeodorizers&airfreshenersproductsaremorelikelytobeusedinelderlycarenursingfacilitiesgoingforward.CompetitivePositioningBuyers(Middlerisk):S.T.sellsitsproductstowholesalerssuchasPALTAC(8283,JP)andArata(2733,JP)thatareexpandingbargainingpowerthroughanumberofbusinesscombinations.Also,inretailindustry,drugstoresarealsogaininglarge

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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buyingpowerrecentlyandpricesofconsumergoodscomeunderpressure.Meantime,S.T.CORPORATIONhaschangedthegame,focusingonsellinghighpricedproductsratherthancommodities.Forinstance,S.T.lost5%saleYoYbutraised10%grossprofitYoYindehumidifiers,andgained7%grossprofitfromincreasing3%saleYoYinglovesforFY03/2017.S.T.triestopromotedifferentiationstrategyfrompricecompetitionincommoditygoodsandthestrategyiscurrentlyapparentlydoingwell.OPmarginhasbeenincreasingfrom4.5%inFY03/2014,3.8%inFY03/2015and4.8%inFY03/2016to6.2%inFY03/2017.SalesdiscounthasbeendecreasingfromJPY857millioninFY03/2014,JPY863millioninFY03/2015andJPY885millioninFY03/2016toJPY520millioninFY03/2017.Therefore,buyersriskwouldbemiddle.Suppliers(Lowrisk):S.Thascloseandlong-termrelationshipwithsupplierssinceitsoperationstartedin1946.Suppliersriskwouldbeminimalatthismoment.Competition(Lowrisk):Duetoitshighmarketshareandlimitednumberofplayersindomesticmarket,competitionriskinindustrywouldbelow.NewEntry(Lowrisk):ThemarketsizeofeachproductfieldisrelativelysmallsuchasJPY60billionforevenlargestmarketofDeodorizers&AirFreshenersmarket.Itwouldnoteasytoenterintosuchsmallmarkets,eventhoughtheproductsinnaturerequireshightechnology.Substitution(Low-Middlerisk):Duetoitsnatureofproducts,householdgoodsthatS.T.providestotheconsumerscouldbereplacedrelativelyeasily.However,thosemakersalwaysmonitorconsumer’spreferencesandlaunchanddevelopvalueaddedproductseveryyearinordertogetattentionfromthem.InvestmentSummaryBusinessOutlookDuetobusinessreform,theprofitsforFY03/2017isexpectedtocontinueimprovingandachievethecompanyprojection,althoughsalesareexpectedtoincreaseatmodestpace.CompetitivePositioningandRisksS.T.CORPORATION’scompetitivepositioningisrelativelyhighbackedbysolidmarketshareindomesticmarket.However,themarketsizeofeachproductfieldisrelativelysmallsuchasJPY1billionto6billionandthemarketisexpectedtogrowatsoft.Duetoaccelerationofagingpopulation,airrefreshersmarketisanticipatedtogrowofitsproductfields,whereasthedecreaseinthenumberoffamilyisaheadwindforthebusiness.Withoutsuccessfulincreaseinairfreshenersaswellasfurtherpenetrationintooverseasmarket,itsmid-termgrowthisunlikely.

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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ValuationDuetotheimprovementofprofitability,theincreaseinEBITDAwillpullEV/EBITDAlowerfrom7.2xforFY03/2017to4.3xforFY03/2020(E),whichislowerthanitsaveragemultipleof6.0xfromFY03/2012toFY03/2016.ApplyingvaluationmultiplesonMV/EBIT,MV/EBITDAandMV/FCFof15x,10xand19xthatarethelowestvaluesofpeerssuchasKobayashiPharm(4967,JP),EarthChemical(4985,JP)andFumakilla(4998,JP)tothenormalizedearningsandcashflowsofS.TCORPORATIONandaddingitsnetcash,thevalueisestimatedtobeJPY2,201ashare.Thisis18%discountfromtheclosingpriceofJPY1,790onMay2nd2017.FinancialStabilityS.T.hasmaintainedstablepositivefreecashflow,operatingcashflowandworkingcapital,andisexpectedtostablygrowfreecashflowsforthenextfewyears.Inaddition,S.T.hasstrongbalancesheetwithnodebt.BusinessOutlookFullYearFY03/2017ResultTotalsalewasup2.9%YoYtoJPY45,957millionandOP,RPandNPsurged21.9%YoYtoJPY2,854million,68.3%YoYtoJPY2,902millionand99.2%YoYtoJPY1,817million,asproductmixwasimprovedsharply.OnattributiontoOP,productmixraisedOPbyJPY1,026millionandthedecreaseinCOGSincreasedbyJPY909million.AnnualdividendisraisedJPY2asharetoJPY24.FullYearFY03/2018OutlookbycompanyS.T.posteditsoutlookforFY03/2018.Saleisexpectedtoincrease8.1%YoYtoJPY49,700million,andOP,RPandNPareexpectedtorise22.6%YoYtoJPY3,500million,13.7%YoYtoJPY3,300millionand23.8%YoYtoJPY2,250millionrespectively.AnnualdividendwillincreasetoJPY26ashare.FY03/2018forecastbyMETRICALMETRICALexpectsS.T.posteditsoutlookforFY03/2018.Saleisexpectedtomissthesaleprojectionbythecompany,increasing3.1%YoYtoJPY47,363million,butprofitswillslightlymovehigherthantheoutlook.OP,RPandNPareexpectedtorise25.8%YoYtoJPY3,592million,20.2%YoYtoJPY3,489millionand25.1%YoYtoJPY2,275millionrespectively.Mid-TermProjectionInmid-termprojection,Salesareexpectedtogrowatmodestpaceof3%perannum,butprofitmarginislikelytokeepimprovingonbusinessreform.S.T.CORPORATIONcontinuesimprovingproductmixbyabolishingunprofitableproducts.Thecompanyhassetinventoryreductiontargetat-20%,cuttingthenumberofSKUby10%andreturnedgoodsby20%.Thecompanyslashedinventoryby14%fromthepreviousyear.Thesemeasureswillpulltheprofitmarginhigherformid-term.METRICALexpectssalestogainJPY50,229million,OPtoriseJPY4,412,RPtoincreasetoJPY4,286millionandNPtogaintoJPY2,683millionforFY03/2020(E).

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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ValuationPeerComparisonTherewouldberoomofupsidepotentialforthesharepriceonpeercomparison.Consideringthe2ndhighestprofitmarginsafterKobayashiPharm,valuationofS.T.lookslowerinPrice/Book,Price/EBIT,Price/EBITDAandPrice/FCF(seetablebelow).

EV/EBITDAEV/EBITDAforFY03/2018(E)isestimatedtobe5.9x.Basedonpositiveoutlookofmid-termprojectioninEBITDA,EV/EBDAisexpectedtodeclinefrom7.7xforFY03/2017to5.3xforFY03/2020(E)(seetheTablebelow).

Sum-of-thePartsValuationSum-of-the-Parts(SOTP)valueisbusinessvalueofeachbusinesssegmentthatisnormalizedEBIT,EBITDAandFCFfromFY03/2012toFY03/2018(E)bymultiplesbasedonthelowestvalueofpeersabove,andaddedtonetcashandlong-terminvestmentsecuritiesandland.SOTPvalueforFY03/2018(E)isestimatedtobeJPY2,201asharethatis18%discountofclosingpriceofMarch2nd2017(seetheTablebelow).

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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FinancialAnalysisS.T.hasmaintainedstablepositivefreecashflow,operatingcashflowandworkingcapital,andisexpectedtostablygrowfreecashflowsforthenextfewyears.Inaddition,S.T.hasstrongbalancesheetwithnodebt.Itsbusinessrequireslessintensivecapitalinvestment.AverageCapExfor17yearsfromFY03/2001toFY03/2017wasJPY921millionandisprojectedJPY980millionforFY03/2018,whileoperatingcashflowwasgeneratedstablyaverageJPY2.4billionfromFY03/2012toFY03/2017.Consequently,freecashflowislikelytoexpandatsloidpaceandthedividendincreaseisverylikely.InvestmentRisksDeceleratingthenumberoffamily(VeryLikely,HighRisk)ThedecreaseinthenumberofhouseholdisinevitableinthepopulationinJapanhasdecreased,ifimmigrationpolicyhasnotchanged.ThisismaterialriskforthecompanyandS.T.triestodevelopelderlycaremarketforitsairfreshenersdemand,assenioragedpopulationisacceleratingatthistime.S.T.aimstoexpandoverseassalesfromJPY3.3billionand7.3%ofitstotalsalesforFY03/2017.Overseassalesshouldbegrowmorerapidly,althoughhigherappreciationofJPYdecreasedJPYbasedoverseassalesforthepreviousyear,increasingonlyJPY200millionfromJPY3.1billionforFY03/2016.Saggingconsumerspending(Likely,MiddleRisk)FordeflationeconomyofJapan,itisatoughfortheconsumergoodsmakertoexpandthesalecontinuously.Consumerstendtobuylowerpricedgoodsinslowergrowthinrealwagesaswellashigherburdenofsocialinsuranceburden.Inordertosolvetheslowerrecoveryofconsumerexpenditure,S.T.changedthegame,focusingonhigherpriceproductsandabolishinglowprofitableproducts.Higherpricedairfreshenersthatistargetedatwomencustomersaresellingwellforthepreviousfiscalyear.Also,Aromaoilhasbeenlaunchedthroughe-Commerceandmail-orderchannel.Consumptiontaxhike(VeryLikely,Low-MiddleRisk)AccordingtothecurrentscheduleofnexttaxhikehasbeensetinOctober2019.Ofcourse,furtherpostponeofthetaxhikeisalsolikelyduetoslowereconomicrecoveryinJapan.OPplungedby15%YoYforFY03/2015atthepreviousconsumptiontaxhikeinApril2014.Successionofmanagement(Likely,MiddleRisk)S.T.CORPORATIONhasbeenrunbySuzukifamilyandshouldclarifyhowthecompanykeepssustainablegrowthasagoing-concernorganization,althoughafamilycompanyperformssuperioraccordingtostatisticalresearchintheworld.Theboardofdirectorsismanagedbythestructureofcompanywithcommittees.However,nominationcommitteeiscomprisedof3familymembersoftotal5.Forsustainablegrowth,themanagementshouldlimitthegovernanceriskinfuture.

AkiMatsumoto,CFAakimatsumoto@metrical.co.jp

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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Appendix

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: akimatsumoto@metrical.co.jp http://www.metrical.co.jp/

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