The Nightmare of any Graham and Dodd Value Investor - Tokyo Steel (JP:5423)

Tokyo Steel came to my attention by a paper of Dylan Grice from Societe General called "Are japanese equities more dead than alive?" from February 2010.

I found the paper an interesting read as I was just starting to invest in Japan. Having said that, unfortunately some statements in the paper are totally off the mark and the quality of the "net-net" analysis, to put it politely, was rather poor. One has to wonder if the author had ever read security analysis and really understood Graham and Dodd's net-net concept.

 "...Today’s Japan is different. Although cheap, Japanese equities don’t offer much value...."

(What facts leads the author to that statement. Quite bold.)

 "...Nevertheless, some stocks are becoming interesting: five names with $1bn+ market caps trading at discounts to liquidation value are highlighted..."

(that might be true, but some of them were not net-nets)

"...the companies being priced as liquidation candidates have a small cap bias. And maybe
this is what we’`d expect to see, with only Japanese exporters offering any real hope of future
growth. But there are some interesting looking exceptions. Here is a list of Japanese stocks
trading at less than liquidation value but with market caps greater than $1bn...."

(looks like the author is having an exporter bias; for the author domestic Japan drawing its last breath?)


 One of those stocks was Tokyo Steel.

The author used the numbers from 2009 (FY 2008). He stated the firesale liquidation value at 185`000 Millions of yen, which was roughly 30`000 Million yen above the Current Asset Value (153´000 Mio. yen) alone.

How a "Graham and Dodd" liquidation value can be above the current asset value  is beyond me.

Also why the PP&E account is integrated in his analysis. A Graham and Dodd net-net analysis totally ignores the property values and only gears towards the liquid assets and the liability side of the balance sheet.

Basically, Tokyo Steel in 2010 wasn't a Graham and Dodd net-net stock to begin with.

Anyways, what happened to Tokyo Steel's asset valuation three years later. I'll tell you. It isn't beautiful.

It is rather the absolute nightmare of any serious Graham and Dodd disciple.

(click chart to enlarge)

Note: long term investmentportfolio are included in current assets

Note: This is only a NCAV analysis and not a liquidation analysis. A proper Graham and Dodd liquidation analysis gives weightings to the differenct compontents of the current assets, which would turn Tokyo Steel's liquidation value negative, at least in 2011 and 2012.

Fact is, that ongoing operating losses have constantly eaten into Tokyo steels liquid position. It went so far that a (not so much) net-net investment turned into an extrem speculative position.

And the moral of the story is, net-net Investing is not a fool proof strategy and
more important so:  always do your own resarch!