Mission-Critical Japanese Business for 0.1x FCF
Also includes a brand new, capex-light AI business for free.
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Warren Buffett once said that if you go A-Z on all the companies in the market, you’ll find things.
He meant perfectly good businesses being given away for nothing.
There are actually many different ways to do this.
My personal favourite is to screen for net-cash businesses and then look at them one by one.
A net-cash business is strange.
If there is net-cash, there is also usually a story to go along with it.
And, as you dig into that story, little asymmetric opportunities start revealing themselves.
Today’s business is one such example.
Here’s the story:
The business has recently suffered a double whammy in the accounting.
First, they have a massive liability that they owe to a major supplier.
This was totally self inflicted, and they agreed to pay a fixed sum, regardless of performance of the project.
The project is functional and cash-flowing, but the repayment of this liability is sucking up all the cash.
Accounting profits just hit multi-year lows.
The liability itself sits on the balance sheet, but is debt-like in nature.
It’s not strictly a debt, but the company has to pay it no matter what happens, so it also kind of is.
This inflates my EV, despite there being a huge amount of net-cash on the balance sheet.
The notes reveal that this liability is to be paid off rapidly, out of revenues generated by the related project.
So rapidly in fact that they already paid roughly a third of it in the last year, and will likely have it completely gone in under 2 years.
In this scenario, the FCF is then fully available to the business to spend how it wishes.
The FCF figure, including the new revenues that are already flowing, is roughly ¥4b per year.
The current market cap is ¥16b.
The EV is where it gets interesting.
If the company just paid off the liability tomorrow, from the net-cash, they would immediately free up the ¥4b in annual FCF.
The EV/FCF ratio, in that scenario would be 3x.
The P/FCF ratio would be 4x.
If the company kept their cash instead and just carried on paying it down with the recurring revenues from the project, the EV/FCF ratio would be closer to 0.1x.
The important part here is that the ¥4b FCF is real and actively being generated.
We don’t need to ‘project’ anything other than what happens once the liability is finally gone within the next couple of years.
But, there’s more.
The company is also conducting a pivot that is designed to generate additional revenue from the ongoing AI boom.
This is completely free, capex light, bonus revenue on top of what they’re already producing.
There is no downside from the AI stuff, because it’s already being priced at zero.
However, recent updates seem to show the whole thing is gathering solid momentum and that this could be reflected in the financials during the next couple of quarters.
Let’s take a look…