Analysis of Nichirin Co Ltd (5184:TYO)

NICHIRIN CO., LTD. is a Japanese company founded in 1914, engaged in the manufacture and sale of automobile and motorcycle hoses such as brake hoses, air conditioning hoses, power steering hoses and other hydraulic and air pressure hoses. The company also produces and sells sanitary fittings. It has 1,860 employees.

Valorization

Let's put it bluntly: Nachirin is a real bargain. It trades at just 7.7 times recurring earnings, 1.3 times tangible book value, 0.64 times sales and 7.9 times free cash flow. At first glance, the dividend yield seems dismal, at just 1.37%, but this is explained by a payout ratio of just 10.6% to earnings and 10.9% to free cash flow. Nachirin therefore has enormous room to increase its distributions in the future. The Japanese company has not held back from doing so in the past, since it has increased its dividend at an average annual rate of 27.5% over the last five years, while failing to even keep up with the earnings curve!

Balance sheet & result

Just like the dividend, profits, cash reserves and asset values are growing over the long term, which proves the strength of Nachirin's business model. The Japanese company clearly succeeds in creating value for its owners and this is reflected in the share price which has more than quintupled in the last five years! This small company is a real war machine for generating results on a recurring basis, year after year.

The company also has very comfortable liquidity, with a current ratio of 2.66 (up) and a reduced liquidity ratio of 2.15. Nachirin therefore has no gray hairs to worry about in meeting its current financial obligations.

Margin-wise, it's not bad either, with gross margin up to 25% and free cash flow margin of 8%. It's just as good for return on assets, up to 8.8%, for an even higher cash flow return on assets of 13%. Nachirin is a very profitable business, which manages its overheads well and generates abundant cash.

As for debt, it has been steadily declining for many years, with a long-term debt-to-asset ratio of only 3%. The Japanese company would theoretically be able to wipe out all of its debt within six months, using its free cash flow. Let's also add that share capital has remained stable for years, which avoids any dilution of shareholders' equity.

Conclusion

Nachirin is a very profitable and very solid company, with a history of more than a century. It has seen world wars, nuclear fire, Japanese deflation pass around it and it continues to produce and market its pipes despite everything. It is not really the sexiest thing (although...), there are very few institutions who are interested in it, but it is devilishly effective.

I believe its price should at least double to reflect its intrinsic value and the dividend should do at least as well.

So I just took a position on this nugget.