Riken Keiki (company website) is a Japanese company that manufactures and sells gas monitors. Their monitors are used to detect toxic gases, to prevent oxygen deficiencies and to prevent gas explosions. Users are oil refineries, petrochemical and chemical facilities and various other industrial users. Examples of the gas detectors it sells can be found here: Riken Keiki products.
The company is currently trading at ¥558 and 23.2 million shares are outstanding (446k shares are held in treasury), giving Riken Keiki a market cap of ¥12.95 billion.
Shareholders’ equity on 09-30-2012 was ¥25.7 billion. The company has a strong balance sheet. Cash & cash equivalents were ¥9.1 billion, but the company also holds another ¥2.2 billion in non-current investment securities. Total liabilities were ¥7.3 billion of which total debt was around ¥1.7 billion. Riken Keiki is trading at a discount to NCAV. NCAV on 09-30-2012 was ¥13.9 billion, this is excluding the non-current investment securities.
The company has shown continued profitability over the past 10 years and the current P/E ratio is about 8. Sales have been fairly stable, growing slightly until 2008 and dropping a little since the financial crisis hit. More importantly, the company has also been cash generative. Even though there has been some lumpiness because of swings in working capital needs from year to year and higher capex last year, the company’s free cash flow looks good. I think Riken Keiki should be able to generate at least ¥1 billion in FCF on average going forward.
I don’t know much about the quality of Riken Keiki’s products or their position in the industry. The company has an American partner in RKI Instruments which sells Riken Keiki products in North America. Riken Keiki also has a European sales and service office in Germany: RKI Analytical Instruments GmbH.
As so often with Japanese companies an investor looking at Riken Keiki will ask himself what the company is going to do with the cash. In my previous post on Japanese stock Maruzen I wrote that my strategy is to buy companies where I have some hope capital allocation will be more rational than at some of the biggest cash boxes out there. In short my theory is that a company with a very long history of hoarding cash is less likely to change its ways then a company that has been building up cash for a shorter time. Since poor capital allocation is probably one of the most important reasons for the low valuations of many Japanese companies, I prefer to choose companies that offer a better chance of improving their capital allocation. Perhaps this strategy will prove to be nonsense, but the fact is that an investor in Japanese stocks needs to use some criteria to make a choice between all the bargains that are still out there in Japan. Buffett’s comment about feeling like an oversexed man in a harem comes to mind.
Riken Keiki pays a reasonable dividend and currently yields about 3%. Unfortunately the company has not repurchased a meaningful amount of shares. In this regard I like Maruzen a little better, because they did do a small buyback. Offsetting this factor is that Riken Keiki trades at a very low multiple of book value (0.50).
All in all I like the company and I have made Riken Keiki my second stock in my basket of perhaps 3 or 4 Japanese stocks.
Disclosure: long Riken Keiki (JP:7734)