´´ The Beast - Kawasumi Laboratories (JP:7703)

Wednesday, October 17, 2012

The Beast - Kawasumi Laboratories (JP:7703)

Company Overview

Kawasumi Laboratories Inc. engages in the development of medical devices and pharmaceuticals primarily in Japan and Thailand. Its products comprise disposable medical products and liquid pharmaceuticals used for blood purifying in minimally invasive therapies. It utilizes plastic molding and processing technologies to produce and supply various medical devices that belong to categories such as Hemodialysis, Blood Bank, Cardiovascular Systems and Infusion Therapy. It operates in two main business segments; Blood Transfusion / Vascular Access and Dialysis/ Therapeutic Apheresis. Kawasumi Laboratories Inc. was founded in 1954 and is headquartered in Tokyo, Japan.

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Valuation metrics are based on data from fiscalyear 2011. Due to extraordinary circumstances (flooding in Thailand) it's highly likely, that readings in fiscal year 2012 will be less compelling.


Analysis of Operation

Business in 2011 and up to now has been rough for Kawasumi. It was hit extremely hard by the floodings in Thailand, as a production plant wasn't operational and inventories had to be written down. The negative impact of those events was material and hasn't been fully incorporated in the FY 2011 numbers, but should be in the current fiscal year.

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For more than twelve years sales has been stagnant, which is reflected in severe margin compression.
In 2005 and 2006 Kawasumi had to report a net loss (operating income and income before tax was positive), mainly due to harsh price competition in Japan, as well as overseas. Price controls for pharmaceuticals and medical devices, intending to cap medical costs in the japanese healtcare system, weren't helping Kawasumi neither.

Average EPS (15 years) is   ¥ 57 ==> cyclical ajusted P/E of 8
EPS for FY 2011 was  ¥ 65 ==> P/E 7


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Japan is still  representing the biggest chunk of overall sales.


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  Sales by Kawasumi's two main business segments are fairly balanced.




Analysis of Cash-Flow


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Although sales were stagnant, Kawasumi was able to generate a nice operating cash-flow stream and even succeeded to strengthen its cash generation from operating activities over time.

Average OCF (14 years) was  ¥ 152 ==> P/OCF (aver.) 3, which is extremely cheap and comes close to the actual EBITDA/EV reading of 2,75 (on that metric the stock appears cheap too)

Furthermore, it was able to generate more than decent free cash-flow. Average FCF (per share;14 years) is ¥ 40. At current share price this is leading us to an average FCF yield of 10%. For FY 2011 FCF (per share) was  ¥ 99, which leaves us with an actual FCF yield readings of whooping 22,8%.

Do not expect a similar reading this fiscal years, due to the aforementioned operational issues Kawasumi is facing currently.

Also it has to be expected that capex remains elevated, due to the construction of a new plant in Thailand (supposed to be operational end of 2013). I expect depreciation charges also to remain elevated, thus depressing income readings.




Analysis of Balance Sheet


Kawasumi has been reducing its modest interest bearing debt in the recent past and by now is almost debt free.

Total asset composition is favourable, with cash and receivables almost equal to fixed assets.

Although current asset composition is more than satisfactory at Kawasumi, with the biggest chunk of liquid assets in cash and receivables, it is not a Graham&Dodd net-net investment in the strictest sense. With a stockprice currently trading around ¥ 440, Kawasumi is trading with a slight premium to liquidation value.

Cash holdings have been seeing a steady increase.

Current ratio and acid ratio show ample readings.

Having seen a nice increase in Kawasumis BPS up to 2000, BPS has basically been flat from 2000 onwards.

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Analysis of Pay-out

 Returns to shareholders are the big issue with Kawasumi. Beeing overcapatialized and having an FCF stream that strong over a protracted period of time, an average pay-out ratio of 20% isn't acceptable. It isn't even really stable, as the dividend cut that took place in 2007 showed. Furthermore, that dividend cut was absolutely unnecessary, given Kawasumi's strong financial position during that period.

Combined with the abscence of any program regarding possible stock repurchases, pay-out policy can only be described as paltry at best.

What is even worse:  Kawasumi issued stocks in 2008 at very depressed stockprice levels, which were given to two japanese corporations to form a business alliance. In 2008 its stock price was already very depressed (not as much as of today) and this corporate action significantly destroyed shareholder value.

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Why is the stock cheap?
First of all, it's cheap because nobody wants to put its chips on the table.
But why the resistents on the investors side?

My guess is, that most offputting (at least since 2008) has been the introduction of a poison pill arrangement in 2008, insulating the company from any action from the corporate control side.

Secondly,the corporate policy on returns to shareholders is extremely discouraging  . Beeing such a cash cow, Kawasumi's dividend pay-out is a joke. More imortant is the lack of willingness to buyback shares, which in my opinion would be the best way to increase shareholder value, given this extremly depressed levels of valuation. Although, the dividendyield of roughly 3% is decent (especially when compared to the depressed longterm interestrates on longterm japanese government bonds), it wasn't archieved due to any increase in the dividends, but rather the stockprice having seen only one direction in the last 18 years! and that is down.

Furthermore, I reckon the low volume in the stock is of major concern for a lot of investors.

Finally, the flooding in Thailand, which hit the company hard, isn't very encouraging neither.

So why I am willing to take my chances?

Because valuation is too compelling and I can't resist. P/OCF of 2; P/S of 0,3; P/B of 0,4 (and most of book in liquid assets), among other metrics are too enticing.

Disclosure: Long Kawasumi Laboratories


  1. The corporate governance here is just an abomination...issuing stock in '08 without needing to - the management should be ashamed (and fired).

    This kind of situation actually happens quite a lot over here - and cutting the dividend unnecessarily is like a pandemic disease in Japan.

    Would be nice to read about competitive position, ability to sustain margins, ability to bounce back from the Thai setback (loss of customers, etc.)


  2. Hi Jan,

    you're right. So far the corporate governance has been very ugly in this company. Especially between 2007-2008 a few companies in Japan had undertaken atrocities against there shareholder's interests. But I doubt that they were aimed at the bulk of existing shareholders, but rather to get rid of foreign corporate raiders like Steel Partners. Corporate Japan was quite successful in accomplishing; the cost was some serious collateral damage, which might not have been taken into accout by management in that extent.

    By the way, great work you're doing at your blog.