Analysis of Fujitsu Frontech Ltd (6945:TYO)

I wouldn't want to end this year 2017 without offering you one last remarkable Japanese title: Fujistu Frontech. With it, I end the major overhaul of my portfolio started in the second half of the year. From now on I am entering a normal buying/selling phase again, that is to say less active. I still have a lot of cash left to draw if necessary, but the bulk of the troops have been reinvested, the overpriced stocks having given way to others that are much more affordable. I will make a first assessment of this readjustment very soon, but I can already tell you that I am very satisfied with it, since my performance has clearly improved in the space of only a few months, with less volatility in addition.

FUJITSU FRONTECH LIMITED is a Japanese company that has been active since 1940. It is part of the Fujitsu group. The company develops, manufactures and sells ATMs (cash withdrawal), financial solutions, software, storage systems, palm vein authentication devices or radio frequency identification (RFID). This Japanese company is therefore close in its activity to a famous former dividend aristocrat: Diebold (NYSE:DBD). Until recently, this American company had increased its dividend for a whopping 60 consecutive years. But for several years, Diebold had only increased its dividend by symbolic amounts to artificially maintain its status. Between 2013 and 2015, DBD was no longer able to increase its dividend and even had to lower it in 2016 (which proves the famous unhealthy slope of certain dividend payers : slowdown->stagnation->decrease->suppression... so you always have to keep an eye on the evolution of the dividend!). One of the reasons that explains these difficulties of Diebold is the evolution of our society towards an increasingly virtual world, without cash. What about Fujitsu Frontech then???

While at Diebold the price, dividend and profits are falling, to the point of causing losses, and debt is exploding, at Fujitsu Frontech, it's quite the opposite. And to top it all off, the stock is cheap. It is trading at 12.4 times recurring earnings, 1.08 times tangible book value, 0.41 times sales and 4.92 times free cash flow. For comparison, Diebold is trading at 2.65 times sales and it's impossible to compare the other ratios which are all negative at the American company! Fujitsu Frontech's dividend is certainly very modest, with a yield of 1.16%, but it is explained by a distribution ratio of only 14.39%. There is therefore substantial room for the Japanese company to invest in its business or to continue to grow its dividend in the future, as it has done in the past (6.58% per year on average over the last five years). Nothing to do with Diebold, whose yield is certainly higher at present, but with a dividend that is not covered since the company is making losses. At the risk of repeating myself, this proves once again that focusing on dividend yield is not only useless, but also very risky.

Just like the dividend, the profit, cash reserves and asset values are growing over the long term, which proves the solidity of the business model of this Japanese company. Fujitsu Frontech manages to create value over time for its owners and this is reflected in its share price which has more than tripled over the last five years.

Cash reserves are very comfortable, with a current ratio of 2.2 (up) and a reduced liquidity ratio of 1.72. The Japanese company therefore has no problem meeting its current financial obligations. The gross margin is also up, at 22%, as is the return on assets, at 4,93%. As for the debt ratio, it is down, at only 3%. The debt has been falling for several years and Fujitsu Frontech would even be able to erase it in less than half a year by using all its available free cash flow. Despite the absence of recourse to debt, the company has not needed to increase its share capital either, which has remained stable for years. So it's solid!

Fujitsu Frontech (1940) does not have as long a history as Diebold (1859), but the numbers speak clearly in its favor. Sure, physical money may be less used in the future, but the Japanese company is sufficiently diversified into new means of payment to cope with this paradigm shift. Despite the sharp rise in the share price over the last five years, the stock is still trading at half of what it was worth in 1990. So I believe it still has the potential to almost double to its fair value and that the dividend should do at least as much.

So I just took a position on Fujitsu Frontech.