'An underrated player': why did an activist deem a toilet bowl manufacturer a beneficiary of AI?

Japan's largest toilet bowl maker Toto is "the most undervalued and overlooked beneficiary of the AI boom in the memory segment," according to UK-based activist investment fund Palliser Capital, writes the Financial Times (FT). The fund believes that the company's shares could rise by more than 55% due to the development of the advanced ceramics segment for chip manufacturing.

Palliser Capital invested in Toto's equity about six months ago and is now one of the company's top 20 shareholders, the FT reports.

Toto securities at the close of trading in Japan on February 17 rose by 4.3%, and at the moment rose by 5%. Since the beginning of the year, the shares of the Japanese company have grown by 39%.

Palliser Capital made a proposal to Toto to expand its advanced ceramics business in a letter to the company's board of directors last week, Bloomberg has learned. This division of Toto, according to the fund's representatives, can play a key role in the semiconductor supply chain and already provides 40% of Toto's operating profit.

The thing is, explains the FT, that in addition to its flagship Washlet heated seat toilets with bidet function, Toto also produces so-called electrostatic chucks used in the production of memory chips. Toto's electrostatic chucks technology is based on ceramics that remain stable at extremely low temperatures, allowing silicon wafers to be securely fixed during chip production. This makes the company's products in demand for cryogenic etching, a technology that will grow in importance as memory chips become more complex and layered, the publication notes.

The company's securities may also be supported by Toto's sale of cross-shareholdings and better utilization of JPY76 billion ($496 million) of net cash, Palliser said.

Toto has been producing electrostatic holders since the 1980s, applying the expertise in ceramics accumulated in the sanitary ware industry. However, it is only in recent years that this area has become a significant source of revenue for the company, the FT points out. Palliser estimates that Toto has a five-year sustainable competitive advantage before other companies can catch up with the toilet bowl maker technologically. The fund believes the advanced ceramics business has the potential to drive Toto's revenue growth of 30% or more over the next two years - driven by the memory chip upgrade cycle and sustained demand for replacement equipment.

Analysts have previously focused on Toto's advanced ceramics business: last month Goldman Sachs raised its recommendation on the company's shares to "buy", expecting continued strong growth amid expanding global investment in AI data centers, the FT writes.

Four of the nine analysts covering Toto securities advise buying them and likewise four advise holding them in a portfolio. Only one advises selling.

This article was AI-translated and verified by a human editor