Shares of Sugimoto (TYO:9932) have been creeping up a bit lately. As the stock is now trading much closer to net current asset value (around 0.89x, including the long-term investments), I decided to sell my shares. I figured there had to be something cheaper out there. With my Japanese holdings I’m more inclined to sell something relatively cheap and make a switch to something that looks even cheaper. Since I do not know the companies well due to the language barrier, I try to just look at the numbers and to not become attached to any individual company.
Even in Japan the bargains are slowly but surely disappearing. One of my book value screens for Japan on FT.com is down to 43 companies. One year ago there were at least twice as many companies that fit the criteria. Fortunately there are still a number of net-nets and book value bargains out there, even though they are becoming tougher to find.
To replace Sugimoto, I bought Daiken Co Ltd (TYO:5900).
Daiken (company website) manufactures and sells architectural hardware, exterior building materials and other exterior products. Their products include: various types of window blinds, aluminium eaves, mail boxes, delivery boxes, floor vents, grating, curtain rails, etc.
Stock price: ¥615
Outstanding shares (excl. treasury shares): 5,874,437
Market cap: ¥3.6 billion
NCAV (Nov. 30, 2014): ¥5.8bn
Book value: ¥11.0bn
Total liabilities: ¥3.1bn
Daiken is trading at 0.62x NCAV and 0.33x book value. The company is not growing. Revenues have been pretty flat since 2010. The company produced earnings of around ¥400 million per year in that period, so it has been a relatively stable performance. The cash flow statements look solid as well. The company is able to translate those earnings to actual cash. Daiken’s cash balance has doubled from ¥1.4bn in 2010 to ¥2.8bn today.
The main things not to like about Daiken are of course on the capital allocation front. The company pays a small dividend of ¥14 (a 2.3% yield) and there have not been any material share repurchases in the last five years.
A few technical factors might also put investors off. The lot size for Daiken is 1000 shares, which means an investor needs to put up almost $5200 USD to take a position in the company. Many small individual investors will not like this. Daiken is also a small cap with a market cap of around $30 million USD. The company will be too small and much too illiquid for most fund managers. So I don’t think the company appeals to anyone: neither to retail investors nor to most professional investors. Finally, the company is listed on Jasdaq in Japan and not on the main exchange. These factors probably provide a reasonable explanation for the incredibly low valuation of the shares today.
I don’t worry about a lack of catalysts, excess cash sitting on a balance sheet or illiquidity. These elements are all present in Daiken. Buying companies like this has worked out well for me in aggregate, even though individual stocks might not do much for years.
Disclosure: long Daiken Co Ltd (TYO:5900)