A Japanese Cigar-Butt for 0.5x TBV
Also includes a 17% FCF yield, and a 5% shareholder yield while we hold the stock.
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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…