Analysis of Sanei Architecture Planning Co Ltd (3228:TYO)

Sanei Architecture Planning Co Ltd is a Japanese company that has been active in the real estate sector since 1993. It purchases land, plans, designs and supervises the construction of individual houses, then sells them and provides after-sales service. In parallel, it buys, rents and manages commercial and residential properties.

Sanei Architecture is trading at an attractive price of 9 times recurring earnings, 1.75 times tangible book value, 0.54 times sales and 4.7 times free cash flow. The dividend yield is certainly not huge at 1.7%, but it comes with a payout ratio of just 14.43%. This means that the company has plenty of room to invest in its own development or to continue growing its payouts, something it has done at a steady pace over the last five years, growing by over 20% per year on average.

Just like the dividend, the profit, cash reserves and asset values are growing over the long term, which proves the strength of this company's business model. Sanei is clearly managing to create value over time for its owners and this is reflected in its share price which is now trading at six times the value it was... six years ago!

Cash reserves are comfortable, with a current ratio of 2.35 (up) and a reduced liquidity ratio of 1.08. The gross margin is certainly down very slightly, at 16.7%, but for a net margin of 6.3% all the same. The return on assets is up, with an interesting 8.3% and we also note a return on equity of more than 20%. Such figures explain why the price compared to the book value is slightly higher than the stocks that I usually analyze (although the valuation is still correct, in particular compared to sales and free cash flow). We are thus halfway between a stock with Graham and a title to the Buffett. I guess that dividinde must appreciate...

The only real downside is the debt ratio, which has increased to 15%. As already noted in the past, debt is not necessarily bad in itself if it is used well, because it can represent a good leverage effect. It also allows Sanei not to dilute the value of the company for shareholders (the company has not increased its share capital for many years). If we take into account the comfortable general liquidity ratio that we discussed above, we also realize that the company has room to honor its financial obligations. It should also be noted that the free cash flow / total debt ratio is 0.48, which means that Sanei would theoretically be able to repay all of its debt in two years using all of its free cash flow.

At the current price of JPY 2,581, Sanei Architecture is slightly undervalued. However, if the company's earnings continue to grow in the future as they have in the past, the stock could easily triple in the next few years.

So I just bought Sanei Architecture.