Four plays on Japan’s clean-up

Every week, a professional investor tells MoneyWeek where she'd put her money now. This week: Taeko Setaishi, fund adviser, Atlantis Japan Fund.

Seven months have passed since a terrible earthquake and tsunami struck northern Japan. Considerable emergency reconstruction work has now taken place including repairs to roads, railways, ports and power lines. Most manufacturers in the area are operating again and the national economy is recovering. Two sectors in particular- financials and waste disposal- stand to benefit from the recovery. Here are four firms we like.

Sumitomo Mitsui Financial Group (TYO: 8316) is one of Japan's leading city banks. From the 1990s up until recently it suffered from bad debts, poor stock investments, a lack of focus and poor management. However, the management team has now been changed and the bank is concentrating on expanding its domestic mortgage and personal loan businesses. It is also moving into overseas markets (primarily in Asia) and aiming to boost profit margins. Risk monitoring has also been improved. In contrast to many Western banks it has a strong balance sheet. We think that the share price has fallen to a bargain level on a forward price/earnings ratio of just eight. It also offers a gross yield of around 4.3%.

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Nihon M&A Center (TYO: 2127) provides a consultancy service to companies engaging in mergers or acquisitions. What distinguishes Nihon is that it advises both sides (buyer and seller), whereas most competitors work for one or the other. Sellers are normally smaller companies which are profitable but have succession problems. Buyers are typically medium-sized listed companies. Due to the small size of its clients, the average fee received per deal is only 32 million (US$420,000). At present, the company works on around 70 transactions per year, but there are 120,000 potential clients nationwide. Better still, Japanese M&A activity has accelerated in the aftermath of the March disaster. Companies such as Nihon M&A stand to benefit. We believe competition is limited as it is difficult for newcomers to build up the necessary contacts. We project compound annual sales growth of around 15% a year for the next five years and earnings growth of 15%-20% a year.

Waste disposal may not sound like an exciting area for investors, but companies in this sector see an increase in business following natural disasters. An interesting example in this field is Daiseki (TYO: 9793). This industrial waste-treatment company specialises in the processing and recycling of chemically polluted sludge. It boasts proprietary technology, which has driven above average profit margins.

Also of interest is Daiseki Eco Solution (TYO: 1712), a subsidiary of the firm specialising in the treatment of contaminated soil. This company has received several orders relating to the earthquake and tsunami clean-up and reconstruction-related orders are expected to grow from next fiscal year. Based on this year's earnings, Daiseki's forward p/e exceeds 20, which makes the stock look fully, if not over, priced. However, we project sales growth of around 13%-15% a year for the next few years, alongside improving profit margins. For the year ending March 2014, earnings per share could reach JPY130, which brings the p/e down to 11. The stock is now out of favour and at the lower end of its recent price range, which makes the shares even more attractive.