A Stable Cash-Cow for 0.6x TBV
Also includes a negative EV and a 5% SH yield.
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Today’s business is an interesting little find.
It operates in a cyclical industry and suffers lumpy FCF, but generally remains profitable even at the trough.
It has stacked up so much cash that the EV is now negative.
If we strip out the excess capital from the balance sheet, the adjusted ROCE is over 27%.
The EV calculation includes marketable securities that are held under non-current assets.
If I bought the business I would include all forms of cash and securities.
The FCF figure is basically just the 5Y average.
This helps smooth out the cyclical element and is a pretty good proxy for the next 5 years imo.
This business is not a grower, but it is a stable cash-cow.
Given the negative EV, literally any cash we get from the operating business is free.
In these cases, the only thing that matters is whether or not the business really is healthy and likely to continue, and whether it’s a value trap.
The business is a little cash machine that I would definitely like to own in the real world.
It’s certainly not dying.
And the ownership structure does allow for an activist to build a stake.
In fact, a couple of notorious Japanese activists already have stakes.
The best part is that management is already paying dividends and buying back stock.
When we factor in SBC and all other forms of dilution, the total SH Yield today and going forward is roughly 5% per year.
This makes the set up much more compelling because we get paid something while we wait for that re-rating to occur.
Let’s take a look…