Daiken Co (TYO:5900) has been in my portfolio for a little over two years. The original post about the company can be found here. At the time, Daiken was a Graham net-net and selling at 0.62x NCAV and 0.33x book value. The company was – and still is – a pretty stable performer, producing fairly steady earnings and free cash flow.
As so often in Japan, capital allocation was the main issue and the company has not shown any improvement in this department in the time that I owned the stock. Daiken has not bought back a meaningful number of shares and the dividend has not been increased either. This is the type of stock that can easily be dismissed by investors as a “value trap”. Yes, it looks very cheap, but there is no catalyst for the shares to rerate to a more reasonable level.
Yet, this is exactly what happened in the last two months. Shares have moved up from ¥675 in early February to ¥1158 today, with most of the gain produced in the last couple of days on large volume. I’ve not been able to find any news that could explain this sudden move. There is no notice on the company’s website of any recent news and not on Edinet either. My guess is that day traders have become interested in the company for some reason.
The company still looks relatively cheap, with a market cap of ¥6.8bn and a last reported book value of ¥11.6bn, Daiken is still only trading at 0.59x BV. The company is no longer a net-net though, with NCAV (including long-term investments) of ¥6.5bn, the company is now trading just above the net-net threshold.
After yet another rapid price rise during the trading day yesterday, I decided to sell my shares. Daiken is still trading at a large discount to book, but I think there are a number of other Japanese companies trading at larger or similar discounts to BV. Some of them are better in the capital allocation department, buying back substantial amounts of stock or paying a higher dividend than Daiken. Also, the price rise does not appear to be based on any specific developments at the company. All in all, it seemed to me that the right decision was to sell.
Daiken shares roughly doubled from the time of my purchase. A very good result for a two year holding period and a result that offsets some of the laggards in the basket of Japanese stocks. Overall, I’ve been happy with the performance of the basket so far.
Disclosure: no position in Daiken Co (TYO:5900)