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If you’re a business-minded investor, today’s set-up is pretty compelling.

This is one of those situations where the income statement makes the business look far worse than it is in reality.

And, by ‘reality’ I mean much cash it consistently generates for its owners.

Here are the valuation ratios:

NCAV = 2.1

TBV = 0.67

EV/FCF = 4

P/FCF = 4.6

As you can see, it’s trading below the net-value of its tangible assets (minus all liabilities).

These assets are mostly cash, land and buildings.

The FCF figure I used was essentially the 5Y average, because that seems the most appropriate reflection of the next few years.

Last year was triple this number, but included a one-off inventory liquidation.

Aside from the downside protection, the operating business has tax carry-forwards worth €44.64m.

This means the business can earn €178.5m in tax free revenue from here.

All on a market cap of just €25m.

Juicy.

Also, the ownership structure isn’t locked up by family or insiders. The free-float is almost 60%.

There’s room for an activist and protection for minority investors here.

Let’s take a look…

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Today’s business is being priced for significant decline.

In fact, the market is currently implying that the operating business will cease to generate any meaningful FCF beyond the next 5 years.

Here are the valuation ratios:

EV/FCF = 5.3

P/FCF = 5.6

There is no protection in tangible assets, both NCAV and TBV are negative when we strip out all the stuff you couldn’t actually sell in the real world.

However, there is an asset, valued at $0 on the balance sheet that is almost certainly worth the current market cap in its own right.

This gives us the rest of the operating business ($124m FCF per year), and all the other assets for free.

A pretty solid margin of safety, to protect against any liquidation scenario.

On top of this, the total shareholder yield is almost 18%, even after factoring in dilution and SBC activity.

Let’s take a look…

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This isn’t an idea, for a change.

It’s an analysis of the current AI boom, from the perspective of a business owner.

Deep-value isn’t really about buying stocks that are cheap.

It’s about assessing the downside risk above anything else, and buying hard when that risk is virtually zero.

It’s about rational capital allocation.

This is purest when using your own hard-earned money, and maybe even debt that has real-world consequences if you fail to pay it back, with interest.

Because, when you buy things this way, you think long and hard about the risk of things going wrong.

But first, a story…

A few weeks ago we took the kids to a canal museum.

Contrary to what you’re almost certainly thinking, it was actually quite interesting.

Most importantly, it was free, and my kids are not old enough to know any better.

Anyway, in the UK we have an extensive canal system.

It’s just always been ‘there’ and I never really questioned it.

But going around the museum taught me some interesting things.

For example, one of the first canals was the Bridgewater Canal in Manchester.

It was built by a guy called Francis Egerton to transport coal from his mines, and reduce costs.

The project was an incredible success.

Coal prices literally dropped 50% as a direct result.

The savings allowed them to maintain margins but massively expand volume, while customers got cheaper coal.

Many other famous industrialists of the time copied the model and leaned into the canal boom.

These included brands like Wedgewood (pottery) and Cadbury (chocolate).

For those guys, the investment was almost always a raging success.

This was simply down to the massive increase in efficiency.

For instance, on a road, a horse can pull around one ton of goods at a time.

When pulling a canal barge, that same horse could pull more like 50 tons of cargo at a time.

We don’t need my big-buttoned calculator to figure out what this means for the bottom-line.

All in all, the UK built 4,000 miles of canals, all over the country.

It was an integral part of the UK industrial revolution.

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Canal Mania

Investors soon piled into this boom.

In 1790, parliament authorised one new canal to be built.

By 1793, it authorised over twenty new canals.

The appeal was obvious.

Build a canal and charge businesses to transport their goods along them, and receive fat dividends forever.

Simple.

Sadly, it didn’t quite work out for most of those investors, because other people figured out how to build railways.

Trains were just as stable and reliable, but much faster, and operated all year round.

Within 40 years, the canals were on the brink of death and railways started buying them up just to totally eliminate the competition.

It seems weird that there would be a ‘canal mania’ but that’s exactly what happened.

If I was around in 1795, watching all these businesses generate massive gains, I would most likely have become interested in canals.

Business people (generally) made lots of money, and then switched to railways, and made even more money.

The UK economy experienced a very similar benefit.

Almost everyone else, basically lost money, because they were trying to ride a wave that flattened out and died.

And that brings me back to AI.

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The Scale Of Spending

The adoption of generative AI has been astonishing.

ChatGPT reached 100 million users in roughly two months and achieved a level of adoption that appears faster than almost any previous technology.

The demand is obviously real.

However, unlike many internet businesses that came before it, AI requires vast amounts of physical infrastructure.

Every query requires computing power.

Every image generated requires computing power.

Every video generated requires computing power.

The result is an enormous global construction programme centred around data centres.

Recent estimates suggest that building a single 1GW AI data centre costs approximately $38bn.

Around 55% of that cost is spent on servers alone.

This means the AI boom is not simply a software story.

It is a story involving land, steel, electricity, water, transformers, networking equipment, memory chips and specialised processors.

Unlike traditional software businesses where marginal costs are tiny, AI requires continuous investment simply to keep serving growing demand.

This makes future extrapolations tricky, to say the least.

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Inference Is The Key

Much attention has been given to the cost of training large language models.

Training a new foundational model reportedly costs between $50m and $200m and can take several months.

These figures sound enormous, but in reality they are relatively small compared to the scale of the big tech companies.

The far bigger issue is inference.

Inference is what happens every time a user interacts with an AI model.

Every question.

Every response.

Every image.

Every video.

Unlike training, which happens once, inference-costs scale directly with usage.

As adoption increases, the infrastructure required to support that activity expands with it.

This is why capital expenditure plans continue to rise so aggressively.

The real spending is no longer about creating models.

It is about building the infrastructure required to run them at scale.

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The Economics Look Difficult

The question that concerns me most is simple:

“How much revenue will all this infrastructure actually generate?”

The answer is surprisingly difficult to justify.

Capex at Microsoft, Alphabet, Amazon, Meta and Oracle is expected to exceed $600b annually by 2026 and remain around that level for several years.

To justify those investments using current economics requires an extraordinary increase in future revenues.

I saw one estimate suggesting that maintaining current returns on invested capital would require roughly $413bn of additional annual revenue across those companies.

That equates to approximately $50 of additional spending for every person on the planet.

Maybe that will happen.

Maybe it won’t.

What I find most interesting is how the investment community seems to discuss the spending itself rather than the economic returns it must eventually generate.

To me, or any business owner, this is the only question worth asking.

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Forecast Optimism

One of the most interesting analyses I have seen examined projected capex and projected future-revenues through 2030.

The conclusion was a bit worrying.

Even under highly optimistic assumptions, where future revenues flow almost entirely through to profits, most of the major AI infrastructure investors still struggle to generate attractive returns on the capital being deployed.

That analysis does not prove the investments are wrong.

But it does highlight how dependent the entire thesis is on future outcomes that remain highly uncertain.

The current spending is clearly not justified by near-term revenue expectations.

The only credible justification is that these assets will generate substantial profits many years into the future.

Investors are effectively underwriting a future that does not yet exist, and has shown very little signs of existing so far.

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Infrastructure Monopolies

My little trip to the canal museum provides a useful framework here.

During Britain’s canal mania, investors poured huge amounts of money into canal construction.

The underlying economic logic appeared sound.

The demand for transporting goods was real.

The infrastructure was useful.

The total addressable market was enormous.

Yet many investors still earned disappointing returns.

Some canals proved valuable.

Many did not.

Then railways arrived and changed everything.

Useful infrastructure does not guarantee monopoly profits.

I see obvious parallels with AI infrastructure today.

Investors are assuming that massive spending on data centres will create enormous economic value.

It probably will.

But history suggests that building infrastructure and earning monopoly profits are two very different things.

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Asset Lifetime

Another concern (for me) is asset longevity.

Much of the cost of AI data centres is concentrated in servers and computing equipment.

I saw some other analysis that suggests these assets may only have useful lives of three to five years.

That feels like an impossibly short period in which to earn back the original investment.

Land and buildings may endure.

Grid connections may endure.

But the most expensive components apparently depreciate rapidly.

This creates a very different economic profile from traditional infrastructure.

Investors are effectively betting that today’s spending can be recovered before the next generation of technology makes current hardware obsolete.

This is another tricky assumption, given the sheer pace of the advancement.

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AI Is Still Being Subsidised

Another concern I have is that many AI services remain heavily subsidised.

The objective appears to be acquiring users and market share rather than generating profits.

OpenAI’s video platform Sora reportedly generated lifetime revenue of around $2.1m while costing approximately $15m per day in inference expenses.

The economics were so unfavourable that the service was recently shut down.

It’s a reminder that technological capability and economic viability are not the same thing.

Many AI applications are impressive.

The harder question (which no one seems to be worrying about) is whether they can ever become sufficiently profitable.

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Cheaper Alternatives May Emerge

The bullish case for AI infrastructure rests on the idea that demand for intelligence is effectively unlimited.

Maybe that is true.

But even if demand is unlimited, that does not mean demand for expensive infrastructure is unlimited.

Many tasks can potentially be solved using smaller, specialised models that require only a fraction of the computing power.

Another piece of analysis I read involved podcast transcription for a company called Overcast.

Using a large commercial AI model would reportedly have cost them approximately $30m per year.

Using a specialised smaller model apparently reduced the cost to roughly $10,000.

The productivity gain was achieved either way.

The expensive infrastructure was not necessary.

This is another thing that would keep me awake at night (if I was betting my money on AI infrastructure).

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The Financing Structure

The financing arrangements behind the AI boom are becoming increasingly complex.

We’ve all seen the ‘circle-jerk’ memes on social media.

Large technology companies are funding construction from operating cash flow.

However, substantial amounts of debt and private credit are also entering the system.

Special purpose vehicles are becoming common.

Suppliers are financing customers.

Capital is moving through increasingly complicated structures.

Leverage, opaque financing structures and circular funding arrangements have appeared repeatedly throughout financial history during periods of speculative excess.

When I see risk being shifted around the financial system in creative ways, I become more cautious rather than less.

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Useful Isn’t Necessarily Profitable

This is really my ‘bottom-line’ concern.

I have no doubt that AI will be useful.

I have no doubt that automation will continue expanding.

I have no doubt that important new businesses will emerge.

But usefulness does not automatically translate into attractive shareholder returns.

The current market narrative often assumes that because AI is transformative, the infrastructure being built today must therefore be enormously valuable.

History suggests that conclusion is far from certain.

Canals were useful.

Railways were useful.

The internet was useful.

Yet many investors who financed those booms earned disappointing returns.

The winners often emerged later and in unexpected places.

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The Missing Downside Protection

The core issue is not whether AI changes the world.

The core issue is whether today’s infrastructure spending can generate returns that justify today’s valuations.

At present, I struggle to answer that question confidently.

What I see is:

• Massive capital expenditure.

• Extremely optimistic assumptions about future demand.

• Short-lived hardware assets.

• Subsidised economics.

• Complex financing structures.

• Returns on invested capital that already look difficult to justify.

That does not mean AI is a fraud.

It does not mean the technology will fail.

It simply means that investors may be confusing technological success with investment success.

History repeatedly shows that the two are not the same thing.

My concern is that the infrastructure boom currently underway may eventually look more like the canal mania than investors realise:

Useful, transformative and economically important, but incapable of generating the monopoly profits required to justify the capital invested.

For a deep-value, business-minded investor like me, there is just far too much uncertainty and not enough downside protection to get involved at this point.

If, like me, you prefer investments with full downside protection and a massive margin of safety, you might like my newsletter.

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The market is valuing today’s business as though its operating business is already dead.

At today’s price, we can buy the entire company for just 0.6x TBV.

The market cap is ¥12.45b despite the business owning approximately ¥21.3b of conservatively calculated real-world tangible assets.

Even after stripping out questionable assets and deducting every liability, investors are paying roughly 60 cents for every ¥1 of hard asset value.

The absurdity becomes even clearer when you look at the operating business.

After netting out cash and marketable securities, the effective enterprise value falls to roughly ¥3.38b.

The sustainable owner-adjusted FCF is ¥900m per year.

In other words, the entire operating business could theoretically repay its acquisition cost in less than four years through normal cash generation alone.

Yet this is not a distressed company.

Over the last five years, revenue has increased from ¥11.6b to ¥14.79b.

Operating margins have expanded materially.

Operating cash flow has remained consistently positive through inflation shocks, supply chain disruption, geopolitical turmoil and industry headwinds.

The balance sheet has accumulated more than ¥12b of combined cash and liquid securities.

Here are the valuation ratios:

NCAV = 2

TBV = 0.6

EV/FCF = 3.7

P/FCF = 13.8

For the current valuation to be rational, the market must be correct that the business is entering terminal decline.

The reality appears very different.

At this point, it seems far easier for the stock price to re-rate upwards than for the business to actually die.

Let’s take a look…

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The market is pricing today’s business as though it’s already dead.

Today, we can acquire the entire thing for ¥5.68b.

Yet the balance sheet alone contains ¥7.21b of extractable cash after adjusting for restricted balances, fulfilment obligations and other non-owner claims.

The market is effectively saying that management will destroy all that excess capital and that the operating business itself is worth nothing.

This is not a distressed business.

It has remained profitable through multiple cycles.

It has just completed a heavy investment period.

It now appears capable of producing roughly ¥1.0b of sustainable owner FCF each year.

At today’s price that implies a 17.6% owner earnings yield, and roughly 5% annual shareholder yield before any change in capital allocation behaviour.

Here are the valuation ratios:

NCAV = 5.1

TBV = 0.5

EV/FCF = 7

P/FCF = 5.6

These tell us the business is liquid and healthy.

The real attraction is the significant discount to the value of its net-tangible assets.

This is supported by the fact that operating margins are actually stable, and positive, despite falling revenue.

For this price to make sense, you have to believe several things happen simultaneously:

The cash never escapes.

The operating business enters a permanent decline.

And a business that has historically converted accounting earnings into real cash suddenly loses that ability indefinitely.

Of course, anything is possible, but healthy cash-generative businesses almost never just die, in real-life.

This is one of those situations where even the slightest bit of positive news from the business generates a large re-rating.

Let’s take a look…

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At today’s price, the market appears to believe this business is a capital-heavy operator with volatile economics, poor capital allocation and a bleak future.

The valuation implies the operating business itself is worth almost nothing.

That implication becomes difficult to reconcile with the underlying economics.

Today, you can effectively acquire the operating business for an enterprise value of roughly ¥3.37b.

A strict liquidation analysis suggests approximately ¥3.29b of recoverable value already exists on the balance sheet.

In other words, almost the entire purchase price appears covered before assigning any value to growth, customer relationships, operational know-how or future cash generation.

And this is not a distressed business.

Over the most recent year:

• Revenue grew 14.6%

• Operating profit grew 38.8%

• Net income grew 52.0%

• Gross margins reached 27.0%

• Return on equity reached 12.7%

The business also sits on a record pipeline.

Current contracted and in-progress activity totals approximately ¥12.13b, almost 3x the current market value of the entire business.

The market cap is ¥4.1b

Meanwhile, the business generates roughly ¥511m of sustainable owner FCF.

That’s a 15.2% owner-adjusted FCF yield against enterprise value.

To justify today’s valuation, several things likely need to be true simultaneously:

• Future profitability must collapse materially

• The forward pipeline must fail to convert into cash

• Asset values must deteriorate sharply

• And the operating business itself will generate no cash again

However, the reports describe something else entirely.

They describe a business with growing profitability, unusually high forward visibility, structurally attractive economics, cash generation and a fortress balance sheet.

The ownership structure is not locked up by any founders, insiders or family owners, which means the cash can (theoretically) be unlocked.

Let’s dig in…

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My goal is to find businesses that I would love to own in the real-world.

Not fancy businesses, or exciting businesses, just the ones that throw off cash consistently every year.

When something looks like it could last forever, I’m even more interested.

When it’s priced cheaply I start buying.

Today’s business is a classic example of the type of business I love to find.

It’s also a great case study in how to figure out the real-world value and whether or not it’s trading at a good price.

If you search for cheap stocks, you’ve probably encountered this business.

The EV/FCF ratio is currently around 2.5x while the P/FCF ratio is roughly 3x.

The balance sheet is also a fortress, with net-cash equivalent to roughly 30% of the market cap, which is currently $3.65b.

When a massive business like this is trading so cheaply, I get interested.

Let’s take a look…

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Today’s business is being priced for terminal decline and complete collapse within the next few years.

Despite the fact the core business has been operating for over 100 years, and has been through every major cycle and crisis during that time.

The reality is that management is buying stock with their own money on the open market and the balance sheet is a fortress of liquidity.

Here are the valuation ratios:

TBV = 0.6

EV/FCF = 5

P/FCF = 5

We have massive downside protection from the balance sheet, which full of cash and tangible assets.

The idea behind this one is really simple:

If you don’t think that every worst case scenario disaster will actually happen, there is probably a nice return to be made.

Let’s take a look…

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I view every stock through the lens of actually buying the business in the real world.

On the one hand, the assets of today’s business are highly attractive.

They own property worth the current market cap value alone, and the brand is recognised and well known.

In fact, the TTM revenue generated by that brand is almost $200m.

They hold net-cash and virtually zero debt.

The problem is the management team.

If I was buying this business, it would be on the understanding that I’m going in, firing basically all of them and starting again.

This would be a hassle, to say the least.

The good news, is that most of them have already been fired, so the clean up is underway.

The downside is also fully protected and other active catalysts are playing out too.

It’s more of a special-situation / arbitrage play more than a traditional business acquisition.

But there is at least 100% upside if the catalysts successfully take hold.

Let’s take a look…

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When you search for stocks using a bottom-up approach, you naturally start bumping into the currently-hated sectors.

For me, recently, this means software.

Two years ago, I didn’t come across a single software stock.

Today, I find them weekly.

This is natural, of course, after the SaaSpocalypse over the last twelve months, but it still surprises me.

The surprise is usually pleasant, because I optimise my search for businesses with net-cash and healthy FCF generation.

In other words, I’d much rather own a software business with its massive margins and zero capex costs, than a bolt manufacturer in rural Japan.

Right now, Mr Market is offering us that exact opportunity.

Today’s business has it all:

Net-cash is equal to almost half the market cap, 99% of revenue is recurring with 96% retention rates, and 50% renewal expansions.

The contracts are all sticky and embedded with governments and local authorities.

Every $1 the customer spends with this business actually saves that customer $12 in future costs.

They’re also expanding.

Between 2021-2024 they expanded at a CAGR of 59%.

Of course, there are a couple of reasons the market sold it off, but the question is; has the market gone too far, and is this now a bargain set-up?

Let’s take a look….

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This Japanese healthcare-software business currently trades at a market capitalisation of just ¥9.65b.

The market is pricing the company as though its core business is permanently impaired, and management will burn through its enormous cash reserves.

At first glance, the fear appears understandable.

Consolidated operating profit guidance for 2026 collapsed from ¥2.02b in 2025 to just ¥400m.

Interim operating profit even swung into a small loss.

The market saw this and concluded that the underlying economics had broken permanently.

The economic reality looks entirely different.

This business is a profitable, cash-generative healthcare platform holding ¥4.25b of extractable cash.

That means roughly 44% of the entire market capitalisation is backed by free-and-clear liquidity.

After adjusting for debt-like obligations and truly economic liabilities, the real acquisition cost of the operating business is only ¥6.31b.

Against that acquisition price, the business appears capable of sustainably generating roughly ¥1.3b of owner free cash flow.

The market is offering us a dominant business for under 5x FCF while heavily protecting downside with a fortress balance sheet.

The disconnect between price and reality here is pretty extreme.

Let’s take a look…

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The stock price of today’s business is almost half of what it was last year.

Prior to this, the market was pricing it as a durable compounder, which saw the peak stock price almost 3x where it is today.

Since then, the market has changed its mind.

The current price implies that the whole business is worth only the extractable value of its tangible assets.

It implies that the operating business is completely worthless and will fail to generate sustainable cash-flows, going forward.

When the market starts pricing things like this, people like me start showing up.

Let’s take a closer look…

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Today’s business is pretty compelling.

It’s cheap to both assets and earnings.

In fact:

We are acquiring the company at an 18% discount to its tangible liquidation value, while getting an operating business with a 20% FCF yield, for free.

Here are the valuation ratios:

NCAV Ratio = 1.3

TBV Ratio = 0.8

EV/FCF Ratio = 4.7

P/FCF Ratio = 4.9

The business itself is in a competitive industry, but they have carved out a very durable business model, built to thrive in that environment.

On top of all this, the core segments are growing strongly and we get paid a dividend while we hold the stock.

Let’s take a look…

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The market is currently pricing today’s business as a distressed asset in terminal decline.

No growth ever again while the existing cash-flows rapidly deteriorate into nothing within the next 5 years.

It also assumes that, during the same period, the management team will burn all of the cash, which currently represents 61% of today’s market cap.

When we read the actual reports, we see a business compounding its annual recurring revenues at 17% per year, since 2021.

We see sticky blue chip customers on 3-year contracts, paying annually, up-front.

We also see those clients retain at a rate of over 95% (often 98%+).

There’s no debt.

This certainly doesn’t look like a dying business.

Quite the opposite.

In fact, as I was researching the business, I couldn’t help getting excited about the thought of selling their products.

Also, refreshingly, the reason for the sell off has nothing to do with AI disruption.

In fact, for this business, AI is a structural tail-wind that is likely to propel it forward, rather than eat it alive.

So, we have a high-quality software compounder, benefitting from the AI boom, being offered to us at a bargain basement price.

Let’s take a look…

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Today’s setup is a classic special situation.

There is no point analysing the business as I normally would, because it’s basically a binary bet on an outcome.

The downside is protected by a mountain of cash and liquid assets, while the upside offers an opportunity for the stock price to go parabolic.

This one caught my eye and I decided to dig a little deeper. This article contains everything I found out during my research.

If you’re into this kind of thing, you might like today’s idea…

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Today’s business offers a very compelling set up.

But first, the bad news.

The stock is basically held by a group of aligned insiders that control 50% of the votes.

There is very little chance of an activist building a stake.

However, there is no real prospect of those existing owners performing an involuntary delisting at an absurdly low price.

There are also two things that make this worth exploring further.

First, the land value appears to match or exceed the current market cap alone.

It was acquired decades ago which makes the book value totally detached from the economic reality.

In other words, we buy the land at fair value and get a healthy, cash generative, durable business for free.

That business is generating a FCF yield of 40% against the EV and 10% against the market cap.

Not only that but we also get all of the cash (75% of market cap alone) thrown in as the cherry on the cake.

There’s more…

The management team is feeling the heat from the recent governance reforms.

In response they just announced “continuous sequential dividend increases” in order to return the excess cash to shareholders.

The dividend yield will be marching higher and higher for the foreseeable future.

When we strip away that excess cash completely today, the ‘look-through’ ROE is around 23%.

This is no compounder, but it is an excellent capital return vehicle, with lots of capital to return.

And management just started the process.

Let’s take a look…..

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This business is being priced as if its earnings are about to disappear.

The market is effectively saying:

“Take the cash, ignore the rest, and assume the operating business isn’t worth much at all.”

But the numbers tell a very different story.

Right now, you’re paying roughly £19m for the entire operating business.

That business is quietly generating around £4m per year in owner-adjusted free cash flow.

It has no meaningful debt.

And it’s sitting on net cash of nearly £13m, which is close to half the market cap.

So, why is a cash-generative, financially solid business being priced like it’s about to fall apart?

And, why do I believe that the market has got this wrong?

Let’s take a look…

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As you might know by now, before stocks, I used to buy and sell small businesses in the real-world.

When I search for stocks I use the exact same valuation framework that I did back then.

The price is probably the most important component.

After all, anything is a bargain at the right price.

Beyond that, I always got excited by businesses that seemed like they would just keep trundling along forever.

Things like waste management, commercial cleaning or niche products that solved a really complex or regulated problem.

Today’s business is one of these.

It’s a business I’d be delighted to own, whole, in the real-world.

The kind of business that is likely to continue generating cash for the foreseeable future.

More importantly, it’s currently priced like it will be dead in just a few short years, but the reality is very different.

It’s growing its revenues and cash-flows YoY, and the business is pretty efficient at converting revenue into owner-adjusted FCF.

In other words, it’s far from dying.

Let’s get into it…

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The market is pricing this business like it’s about to disappear.

It’s generating $100m in annual cash flow.

And, you can buy the entire operation for just over $100m after adjusting for the net-cash.

That’s roughly 1x FCF.

No growth required. No turnaround needed. Just survival.

And yet, revenues are still growing.

Cash flow is still compounding.

The business just cut 30% of its workforce, and none of that benefit is fully reflected yet.

So why is it this cheap?

Because the market believes something has fundamentally broken.

That the core product is becoming obsolete.

That demand is evaporating.

That this is the beginning of a slow decline to zero.

The evidence in the reports suggest this isn’t the case.

When a business with this level of liquidity, this kind of operating efficiency, and this much embedded data is priced like it won’t make it through the next couple of years, I start investigating.

Because if it doesn’t die…

This isn’t just cheap.

It’s absurd.

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Today’s business is based in Tokyo, Japan.

It was founded in 1994, and creates mobile games for a mostly domestic audience.

The market cap today is ¥3.85b and the EV is ¥4.22b.

I calculate the EV using all debt-like obligations along with all cash and marketable securities.

In this case, there is a debt-like obligation (¥2.8b) related to the acquisition of a business in 2022.

This isn’t structured as debt on the balance sheet, and is included in accounts payable instead, which is slightly misleading.

Some screeners show a much lower EV figure, but if I was buying this business, I’d count it as debt.

This still compares pretty nicely to the average FCF figure of ¥1.25b per year.

Here are the valuation ratios:

TBV Ratio = 2.4

EV/FCF Ratio = 3.4

P/FCF Ratio = 3

This is purely an earnings play.

Even more specifically, this is a play based on the fact that the business generates strong, consistent cash-flows.

The FCF calculation is relatively simple here.

We take OCF and deduct maintenance capex.

We then use an average over the last 3 years.

This factors in the new reality of the business after they acquired another business in 2022.

Those cash-flows generate a Return on Equity of roughly 16% per year and a yield (on today’s EV) of over 29%.

Today’s price implies that the operating business is worthless and that it will effectively cease to exist within the next 5 years.

This, as ever, is entirely detached from the economic reality of the business.

First, there’s that 2022 acquisition.

The total purchase price was ¥5b, but the net-assets of the new business were worth much more than that.

In other words, a Japanese cash hoarder bought another Japanese cash hoarder at a significant discount to its tangible book value.

As if this wasn’t good enough, they also paid roughly 2x OCF for the earnings.

So, basically, this business actually got paid ¥1.86b, to complete the transaction.

This is no compounder, but it is a cash-cow that can be milked, very profitably, at today’s price.

Crucially, the float is wide open for an activist to build a stake and unlock all this value.

This fact is the main reason I find this idea so compelling.

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