Fukuvi Chemical Industry Co Ltd (T:7871), is one of those stocks that is just too undervalued to ignore.
Fukuvi (Tokyo "7871") is a diversified industrial company. Founded in 1953, it has stood the test of time. According to the company’s website, it has three business segments:
- interior residence materials, exterior decorative materials and apartment building flooring systems.
- Resin parts used in a wide range of application such as residential equipment, office equipment, consumer appliances, etc.
- Manufacture and sale of precision chemical products, including artificial marble, precision resin products, etc.
The company’s businesses appear mature. Growth has been minimal in recent years.
The balance sheet appears very strong. Here are the highlights in millions of Yen as of June 30, 2016:
- Current Assets 32,108
- Non current Assets 12,337
- Total Assets 44,446 [ = (1) + (2) ]
- Total Liabilities 17,464
- Net Current Asset Value 26,982 [ = (1) – (4) ]
The company has 20.7 million shares outstanding. Thus net current asset value per share is 707 Yen. The stock trades at just 486 Yen on November 7th, 2016. That’s a 31% discount to net current asset value.
The company has 10,726 million Yen in cash, or 518 Yen per share. Cash per share exceeds the price of the stock.
The company’s businesses produce solid cash flow over time. Cash from operations has averaged more than two billion Yen per year. Capital expenditures have been in the 800-900 million Yen range. Thus free cash flow is typically about 1,100-1,200 million Yen per year, or roughly 55 Yen per share. The stock trades at just 8.8x free cash flow per share.
The stock has no obvious catalyst to trigger a significant revaluation in the near term. In addition, Japan’s sub-par economic performance over the past decade or two is well known. However, change is afoot in Japan. The Stewardship Code of 2014 and the Corporate Governance Code of 2015 are encouraging Japanese companies to become more focused on improving shareholder returns. Management teams are increasingly accountable for taking proactive steps to improve returns. Major institutional shareholders are also increasingly accountable for exercising more vigorous oversight over the companies in which they invest.
With a strong balance sheet and a deeply undervalued stock, Fukuvi has some obvious opportunities to increase shareholder value:
1. A stock repurchase program
2. Recapitalizing the company
3. Selling the company to a strategic buyer
In increasing value for the shareholders, we would like to see management take advantage of the undervalued stock price. They could also simply increase the dividend – there is more than enough free cash flow to increase the payout by a significant amount.
By our calculations, pretax returns on net invested capital appear modest in the high single digits. Therefore, we don’t think that reinvesting in the business is the best use of the shareholder’s money – not while the stock is trading at such a low valuation. Therefore, absent a significant improvement in returns, we would view an aggressive increase in capital spending or a large acquisition skeptically.
This article is for informational purposes only. It is not investment advice or an offer of investment advice.