Last close: JPY 412 (or USD 5.00)
For the sake of simplicity, all metrics are quoted in USD. To convert to JPY, multiply the USD metric by 82.4.
Daiwa Industries Limited manufactures and services industrial machinery for heating and cooling, such as freezers, showcases and ice machines. Daiwa’s current market value is $257 m and in 2010 it generated $342 m in revenue and $71 m in EBITDA (21% margin).
Daiwa is listed on the Tokyo Stock Exchange and all official communication from the company (i.e. website, reports, etc.) is in Japanese. I do not read Japanese, so I have relied on public databases to evaluate Daiwa’s published information. Daiwa is not covered by any Wall Street analyst.
At $5, an investment in Daiwa has very limited downside, if any.
- At 31 December 2010, Daiwa had total cash and short-term investments of $365 m and the company has no debt. Total liabilities were $91 m, primarily comprising current liabilities and pension obligations. So, if Daiwa paid down all its liabilities it would still have $274 m left in cash.
- This means that the market is valuing Daiwa’s cash (net of all liabilities) at a 6% discount, and its operations and assets at 0.
I am relatively less familiar with Japanese companies, so it is difficult to place a value on Daiwa’s operations and assets. But, the probability that Daiwa’s operations and assets are worth more than 0 is very high.
- Over the last 6 years, the company’s operations and assets have generated $70 m in free cash flow on average, and its margins and returns on capital/ equity were not bad either.
- At 31 December 2010, Daiwa had $57 m in receivables and inventory.
- Daiwa should be a “going concern” since it is unlikely to be liquidated (Ozaki family owns c. 45% of it and the probability that they would want to keep this company operational vs. liquidate it is high).
Finally, the probability that Daiwa’s accounts are fraudulent is very small because (a) Deloitte (the company’s auditors) have repeatedly qualified its accounts, and (b) Japanese culture - particularly for prominent family companies - limits the likelihood of this scenario.
Bottom line: at a minimum Daiwa’s shares are undervalued by ~6%, and potentially significantly more.
The catch is that -
- Daiwa’s publicly traded shares have a small float and trade volumes are small. As such, one’s ability to bet very large amounts of money is perhaps limited; and
- The market can be irrational for longer than one can remain solvent.
Maybe truly patient investors will even welcome a sandwich for lunch if it is free?
