Fingerübung - Co-Cos (JP:3599)

And here we go. Another japanese net-net stock.

Co-Cos hasn't got an english internetpage. I have to rely on data from Businessweek and  MSN Money. 2012 numbers out on its internetpage (japanese).

Business Overview

Co-Cos Nobuoka Co., Ltd. was founded in 1901 and is headquartered in Fukuyama, Japan. It engages in the manufacture and sale of uniforms and supplies for workers in Japan. The company provides work uniforms, service uniforms, and fireman uniforms. It also offers hats, gloves, socks, and shoes.


  
General

Stockprice as of today stands at ¥ 513.  Co- Cos has little longterm- debt on its balance sheet (roughly 10% of total liablities), never had a loss in the last 8 years and does pay a dividend of ¥ 15 p.a.Equity ratio is 68%

Beware Co-Cos is very thinly traded with an 10 day average of 1100 shares 


Operations

Co-Cos overall sales has been shrinking by an average of 3% p.a in the last 5 years. But it was able to keep margin compression palatable by rigorously controlling its costs. Operating income stayed relatively flat (624 in 2007 vs. 551 in 2011), but net income declined by roughly 50% (412 in 2007 vs. 218 in 2008).

Co-Cos works in a low margin environment with operating margin hoovering around 3% and net-margin around 1,7%. Margins have been recovering since 2009.

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 Low margins are leading to low returns on invested capital. Return on Equity (ROE) averaged a 2,3% in the last 5 years and Return on Assets (ROA) 1,5%.

Cash-flow seems to be a strong suit  (at least lately). Although operating in such a low margin business, Co-Cos was able to increase operating- as well as free cash- flow significantly.

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Higher free cash- flow is mainly attributable to a significant decrease in its capital expenditure.

Decrease in capital expenditure very likely will lead to a decrease in depreciation charges and thus, to an increase in earnings in the future (might be already shown in the new financial data out; as I don't speak japanese I don't know really)

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Valuation and Balance sheet

Valuation

Co- Cos's valuation is moderate to cheap.

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Moderate it is in the sence of having a price/ earning ratio of 13 (actual and average). So theoreticaly it will take roughly 13 years of todays (and average) earning to recoup the initial investment. With the dividend of ¥ 15, Co-Cos is distributing a nice part of its earnings while waiting.

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Cheap the valuation is in terms of cash flow, where the ratios are significantly lower than for its earnings.

Especially free cash-flow yield is impressive.

Balance Sheet

Co-cos is also cheap in terms of value retained in its balance sheet.

 

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Unfortunately, the biggest chunk of Co- Cos's current assets are tied up in inventory and the smallest ammount is in cash. Usually, that isn't what I like to see with a net- net investment, as the liquidation value (discounted current assets) diminishes significantly and with it a significant part of its margin of safety.

But it isn't really dramatic in Cos-Cos's case, as it has got also a relatively valueable investment portfolio, counterbalancing the drawback of its current asset composition.

Investment portfolio included, Co- Cos current price matches exactly its liquidation vlaue.

Conclusion

Nice japanese net-net. Unfortunately no investor relations page in english. Extremely illiquid. Would be sweet to have more cash in the current asset composition, but that drawback is counterbalanced by its investment portfolio. Cash-flow looks very nice.


Disclosure: no position