Denkyosha: profitable and trading at 37% of BV

Japanese shares have been soaring since 2012 and the Nikkei is currently at a level last seen in 2000. As a result many of the net-nets that were available in Japan have now disappeared. This has made it a bit harder to find replacements for companies in my Japanese basket of stocks. As a general rule I sell a stock in this basket when it reaches net-current asset value.

Despite the run-up in Japan, there is one category of Japanese stocks that still offers some net-nets and extreme book value bargains. These are the stocks with a lot-size of 1000 shares. The minimum investment required for a position in one of these companies is often a few thousand dollars. For example: a stock with a share price of ¥300 and a lot-size of 1000 would require a minimum investment of ¥300,000 or about $2400. I’m still finding a decent number of bargains in this category, while the pickings are much slimmer for the rest of the Japanese market.

Of course one could argue that the discounts for these stocks are permanent, because the underlying causes for the discount are unlikely to go away. However, I do think there are positive things that could happen even to these companies that would make them more attractive for investors, like dividend increases, stock repurchases and mergers. Besides, some of the stocks in this category are trading at such extreme discounts to book value and NCAV that it just seems difficult for them to get much cheaper over the next few years.

One example of a company in this category is Denkyosha Co (TYO:8144). The company is a wholesaler of electrical products and household products.

Financial snapshot:

Share price: ¥696
Shares outstanding (excl. treasury shares): 12,535,147
Market cap: ¥8.7 billion
NCAV (March 31, 2015, incl. long-term investment securities & time deposits): ¥16.0bn
Book value: ¥23.5bn
Cash: ¥4.4bn
Long-term investment securities: ¥4.4bn
Long-term time deposits: ¥3.7bn
Total liabilities: ¥7.9bn

Denkyosha is currently trading at 0.55x NCAV (incl. LT securities & time deposits) and 0.37x book value. The company has been consistently profitable over the last five years and has also generated some cash. The company has not repurchased stock, but it does pay a reasonable dividend (current yield: 2.9%). Denkyosha also has real estate that it rents out, which is carried for ¥4.3bn on the balance sheet.

On an earnings basis the company does not look cheap with a P/E ratio of almost 21. The company has had very modest capital expenditures over the last five years. In fiscal 2015 their capex was ¥392m, but in the years before capex was often only around ¥100m. Their average depreciation in this period of ¥110m also suggests that the company has low capex needs. Low capex needs provide some additional safety for investing in book value bargains like this, because the company does not need to invest a lot in plant and equipment just to keep things running. For a company with rather stagnant revenues like Denkyosha (in the ¥40-44bn range) I think this provides some extra comfort.

The main thing to like about Denkyosha is the very large discount to book value. In today’s market it is very hard to find consistently profitable, dividend paying companies trading at less than 50% of book value. In this dark corner of the Japanese market there are still some to be found. It seems hard to lose money on these companies when you buy a basket of them and hold them for a few years.

Disclosure: long Denkyosha Co (TYO:8144)