´´ The Turnaround - Namco Bandai (JP:7832)

Sunday, June 24, 2012

The Turnaround - Namco Bandai (JP:7832)

Company Overview


NAMCO BANDAI Holdings Inc. emenated from the merger of the toy maker Bandai and the game developer Namco in the year 2005. It mainly develops entertainment products and services in the fields of toys, arcade game machines, game software, visual and music software, and amusement facilities worldwide. The company operates in three segments: Toys and Hobby, Content, and Amusement Facility and is headquatered in Tokyo, Japan.

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Analsisis of Operation


Namco Bandai went through difficult times after its merger in 2005. Especially in Japan, where the bulk of its sales come from, Namco Bandai was hit hard by the recession. Severe margin compression followed, and Namco Bandai had to adpopt countermeasures, like laying off work force (yes, some japanese companies do that) and reorganizing business segments, which lead to a net-loss in 2010.

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It looks like that those countermeasures taken by the management, were successful. Namco Bandai turned around its business (at least in Japan) impressively. ROE for fiscal year 2012 is back to targeted levels by management of around 10%.

Gross-, operating- and net-income margins are now above longterm averages, which are (14yrs.) 33,7%; 8,4% and 2,3%.

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Furthermore, EPS, ROE and ROA are all above longterm averages .
Those averages are as follows: EPS = 40 yen; ROE = 4,12% and ROA = 2,6%

With an actual EPS of ¥ 85 actual P/E-ratio stands at a reasonable 12 compared to an average (14 yrs.) of 26.

Still, overseas businesses (here especially in Europe and the Americas) leaves a lot to be desired for and is contributing negatively to Namco Bandai's bottom line. Only the asian business is contributing positively. After turning around the japanese business, management will have to focus on its foreign subsidaries now, to keep the positive operational momentum going.

Analysisis of Cash-flow 


Namco Bandai has never had a negative free cash-flow in 10 years, neither in the strict metric (= operating cf - cf from investing), nor in the normal version (OCF - CAPEX). But margin compression had its toll on free cash-flow metrics. But it seems that those metrics saw the trough in 2010.

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Cash-flow ratios are showing undervaluation in the stock. Actual P/OCF ratio is 7 vs. an average (10yrs.) of 9. Free cash-flow yield is 9,3% vs an average of 6,4%.

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At the onset to business contraction, management slashed capex quite agressively.

In fiscal year 2012 capex increased for the first time in 6 years, showing confidence at the management level about the future of Namco Bandai's business prospect. Due to the increase in Capex it seems likely, that future earning growth will be capped by a future increase in depreciation charges.

Analysis of Balance Sheet


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Namco Bandai is a cash rich company. Almost half of its market cap is in cash and cash equivalents.

This is also reflected in very favourable liquidity ratios, such as current-asset ratio and quick ratio (acid test)

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In 2011 the company was almost free of any interest bearing debt, but it has started taking debt on it books again in fiscal year 2012.

Book Value

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Before the company was hit by the recession, it was able to grow its book value decently over time. Unfortunately, Namco Bandai wasn't able to isolate shareholders from the margin compression it went through and the quite expensive restructuring progress.

Book value is mainly composed of  liquid assets (cash, receivables, inventory and investment securities).
Property, Plant and equipment represent only around 20% of book value. Goodwill and intangibles are neglegible.

Analysis of Dividend and Treasury Stocks


Namco Bandai has been constantly paying a dividend. Its policy on profit distribution is to pay out 30% of net-income in dividends. Although, net-income margins collapsed between 2009 and 2011, the company never reduced its dividend. The last dividend payment (march 2012) even saw an increase of 2 yen per share, to keep the pay-out ratio at the targeted 30% level.

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Furthermore, Namco Bandai's shareholder friendly pay-out policy is accompanied by significant share buybacks, aiming to optimize its capital base. In this context, I don't really understand why the company financed the latest share repurchase with interest bearing debt, given that liquid assets are more than adequate to finance its capex requirement, dividends and share repurchases.



Namco Bandai is a reasonably valued stock with a strong business franchise (at least in Japan).
If management is able to turn-around its international business as impressively as it did with the japan division, I see great potential in this stock.

Disclosure: long Namco Bandai (JP:7832)

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