A Japanese Nano-Cap for 3x FCF
The attractive business model and ownership structure is also appealing to activists.
Get a 90% discount off Bloomberg’s No.1 competitor. Get a 30-day free trial here
Today’s business is headquartered in Tokyo, Japan.
At today’s price the market is implying that the operating business is in terminal decline.
It also indicates that all the cash on the balance sheet is inaccessible or will be destroyed by management.
The reality of the business is starkly different.
It’s a profitable, capital-light technology provider, currently expanding its revenues into extremely durable markets.
Here are the valuation ratios:
NCAV Ratio = 1.5
TBV Ratio = 1.3
EV/FCF Ratio = 3.2
P/FCF Ratio = 9.4
The market cap is currently ¥1.88b and the enterprise value is ¥640m.
As always, I calculate the EV using all debt-like figures, including leases, and all cash and marketable securities.
The 5Y average FCF figure is ¥175m and last year it generated ¥286m.
I calculated FCF by starting with the OCF and then subtracted all forms of unavoidable business costs.
This usually includes items not regularly included in OCF, such as lease costs.
After researching the annual reports from the last few years, I believe it’s reasonable to expect an average annual FCF of roughly ¥200m.
The reason for this is that the company conducted a merger with one of its subsidiaries in 2024.
The purpose of this was specifically to optimise the efficiency of the operating business.
Lower costs and better margins.
They are also successfully expanding their expertise out from their traditional markets.
These improvements contributed to last year’s FCF figure being higher than the average.
It seems reasonable to expect this uplift to continue, even to a small degree, going forward.
Stock Price Decline
There are a few things not to like about the business.
First, it’s a typical Japanese cash-hoarder. The net cash represents 65% of the total market cap.
Next, management haven’t exactly been generous with their capital repayments.
The average yield over the last 5 years is practically 0%.
They have initiated a dividend going forward, but this offers a yield of roughly 1.4% at today’s market cap.
Another issue affecting the business is a severe lack of IT talent in Japan. This has been a headache as the business tries to compete.
The main reason the stock price has fallen almost 50% in the last 5 years, is that it was simply too expensive to begin with.
The actual business model is pretty sweet.
The market got too excited about it and, at one point, applied a PE multiple of 32.
The recent sell-off is just all the hot-air being released from the overinflated stock price.
Today, the price can now be considered cheap, relative to that sweet little business model it still owns.