Komatsu Wall Industry (stock price ¥ 824) was founded in 1968 and is located in Komatsu, Japan. It engages mainly in the design, assembly, construction, and sale of steel and aluminum partition walls predominantly in Japan. It offers movable walls, interior metals, school products, lightweight steel fittings, and WC booths.
Analysis of Operations:
Komatsu Wall has got a rather high operational leverage, which is common for industrial companies. The operational environment hasn't been very kind to Komatsu lately. From 2007 to 2011 sales declined by rougly 5%. Although not being an utter desaster, this decline in sales has had quite a significant impact on its operational metrics, e.g. margin compression, due to the aforementioned high operational leverage. Gross margin fell from 30,3% in 2007 to 22,75% in 2011. Operating margin went from 5,69% in 2007 to -0,84% in 2011 and net margin fell from 3,4% to -0,11%.
In 2010, albeit small, Komatsu had to post its first annual loss in 10 years. And also in 2011 it had to close its book with a tiny loss.
Valuation of Komatsu
Komatsu pays a dividend of ¥ 26, giving us a decent dividend yield of 3,1%. Apart from a tiny loss in 2010 and 2011 the company is profitable. The average EPS for the last ten years stands at ¥ 77 and leads us to a reasonable average P/E ratio of 11.
Generally Komatsu is able to generate a positive operating cash-flow. As Capital expenditure (CAPEX) is relatively low Komatsu is able to generate quite a remarkable free cash- flow (Operating CF - Capex) for such a low margin business. Free cash-flow per share (average.5 yrs.) is ¥ 24 which is leaving us with a. Last year they used that flexibility for a quite significant share buy-back, so it does seem that the management is not totally complacent about giving the shareholders a decent return.
Book Value per share (BPS) is ¥ 2330 and hence Komatsu has got a P/B ratio of around 0,4.
Interesting is to dig a little bit deeper and analyse the composition of Komatsu's book value.
Balance sheet analysis:
Komatsu is debt free and has got an equity ratio of 85%. Not only is the equity ratio extremely solid but also is the composition of its book value pretty favourable. A great share of its book value is in cash, short term investments and accounts receivables. Inventory does just play a minor roll in its current asset composition. Although encouraging that inventory is negligible, I would love to see a greater weighting of cash and short- term investments in comparison to accounts receivables. The big chunk of accounts receivables unfortunately does bring down Komatsu's liquidation value quite a bit.
NCAV value per share is ¥ 1248. With the stock currently trading at ¥ 824 Komatsu is valued at a 34% discount to its NCAV value. The more stringent margin of safety analysis, the liquidation value, is favourable, too. Komatsu's liquidation Value per share is ¥ 977. So Komatsu is trading at a discount of 16% to its liquidation value.
click chart to enlarge
Not included in the intrinsic value analysis is Komatsu's investment portfolio. Investment portfolios in Japan are marked to market and in the majority of cases investments in it are marketable and liquid. In Komatsu`s case the investment portfolio is negligible (¥ 41 per share).
Conclusion
Although Komatsu had a small loss in 2010 and 2011 I regard the company as a nice Graham an Dodd net-net play, which suits well for a diversified portfolio of japaneses net-net stocks.
disclosure: no position
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excellent blog. just reading all the posts. wondering why you did not take a position in this one. i notice its gone way past ncav now!
ReplyDeleteThanks.
DeleteThe company hasn't got an IR page in english.