A Japanese Micro-Cap for 3x FCF
This is a highly attractive set-up for an activist investor.
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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.