Eidai Kako: 53% of NCAV and 29% of BV

A recent buy for my basket in Japan is Eidai Kako (TYO:7877). This is another example of a stock with a lot-size of 1000 shares that is trading at an extreme discount to book value and net current asset value. At the current stock price of ¥287, the minimum investment required would be about $2400.

Eidai Kako makes various synthetic resin molded products. The company is active in two segments: automobile supplies and industrial materials. The automobile supplies segment manufactures automotive floor mats. The industrial products segments manufactures products that include air conducts, residential interior materials and components and materials for refrigerators.

A financial snapshot of the company:

Share price: ¥287
Shares outstanding (excl. treasury shares): 6,334,263
Market cap: ¥1.82 billion
NCAV (March 31, 2015, incl. long-term investment securities): ¥3.41bn
Book value: ¥6.31bn
Cash: ¥1.73bn
Total liabilities: ¥1.96bn

Eidai Kako is a Graham net-net and trades at just 0.53x NCAV. As with all my other Japanese stocks, I did exclude the treasury shares from the calculations. The company holds almost 966,000 shares in treasury. The discount to book value is huge with the company trading at 0.29x BV. It is also notable that this is a very small company with a market cap of only $15 million.

Looking at the financial performance of the last five years shows a reasonably positive picture. Revenues have been in the ¥5.5bn to ¥6.5bn range. Eidai Kako was consistently profitable in this period. Net income in the last few years has been a trending a bit lower to around ¥200m, where in 2012 and 2011 the company was making around ¥280m. The company generally generates cash as well, the exception being 2014 where working capital movements caused free cash flow to be negative for the year. It should be noted though that capital expenditures have been markedly lower than depreciation in the last two years. If the future capital expenditures for this company are closer to the depreciation numbers and profits remain at recent levels, the cash generation looks to be fairly weak.

Eidai Kako has repurchased small amounts of stock in 2013 and 2011. A dividend is also paid, the payment for fiscal 2015 was ¥11, which was raised from ¥8 in 2014. This gives the company a solid dividend yield of 3.8%, but it should be noted that the dividend forecast for next year is ¥8 again.

On a P/E basis the Eidai Kako looks pretty cheap as well. Net income per share was about ¥31 for 2015, giving the company a P/E ratio of 9.3.

Eidai Kako is even cheaper on a price-to-book basis than Denkyosha, but I do think Denkyosha is more likely to keep generating cash in the next few years, because their capital expenditures are so low. Given the industry that Eidai Kako is in it is normal for them to have to invest more in plant and equipment.

All in all Eidai Kako is a company that on a price-to-book and price-to-NCAV basis is probably one of the cheapest profitable companies you can find anywhere in the world today. The company has a lot of cash, is virtually debt free and has increased book value steadily over the years. I think it is a good addition for a net-net portfolio and have bought a small position for my Japanese basket of stocks.

Disclosure: long Eidai Kako (TYO:7877)