Analysis of Narasaki Sangyo Co Ltd (8085:TYO)

NARASAKI SANGYO CO., LTD. is a Japanese company founded in 1902 and engaged in the sale of electrical appliances, machinery, materials and fuel. Its businesses include motors, control devices, heavy electrical machinery, refrigerators, elevators, construction equipment, industrial equipment (manufacturing/processing/logistics/storage), cement and concrete, and asphalt. It also provides shipping, port operation, trucking and warehousing services. The company has 370 employees.

Valorization

Narasaki is trading at an attractive price of 8.7 times recurring earnings, 0.9 times book value and only 0.1 times sales! We will see below the reason for this very low ratio. As for free cash flow it is a little less attractive, since the ratio is at 16.6. Nevertheless, we remain within the realm of reasonableness.

THE dividend yield est assez correct, avec 2.2%, pour un distribution ratio de seulement 18.8% par rapport aux bénéfices et de 36% par rapport au free cash flow. On voit donc que même si on se focalise uniquement sur les flux de trésorerie (qu'on paie comme on l'a vu légèrement plus chers que les bénéfices), il reste passablement de marge à Narasaki pour continuer à faire progresser ce dividende dans le futur. L'entreprise nippone ne s'est d'ailleurs pas privée de le faire dans le passé, puisque les distributions ont grimpé de 12.5% par an ces cinq dernières années, en suivant la tendance des bénéfices.

Balance sheet & result

Just like the dividend and profits, cash reserves and asset values are growing over the long term, which demonstrates the strength of Narasaki's business model. The company is clearly succeeding in creating value for its owners over the long term and this is reflected in the share price which has doubled over the last five years.

Les réserves de liquidités sont suffisantes, mais pas énormes, avec un ratio de liquidité générale de 1.17 (en hausse tout de même) et un ratio de liquidité réduite de 1.14. L'entreprise nippone a donc un peu de latitude pour répondre à ses obligations financières courantes, mais sans plus. La gross margin n'est pas très grande non plus, mais également en progression, à 10.3%, pour une marge nette de seulement 1.7%. C'est ce dernier point qui explique le très faible ratio prix/ventes. L'entreprise produit un bon chiffre d'affaires, mais n'en concrétise qu'une toute petite partie en bénéfices. Le rendement des actifs est lui aussi assez modeste et également en hausse, à 2.85%, avec quand même une rentabilité des capitaux propres de 12.53%.

The long-term debt-to-asset ratio has been steadily declining for several years, and now stands at 5.48%. The company would still need 9 years to repay all of its debt using all of its free cash flow. This is still explained by Narasaki's small margin (FCF amounts to 0.73% of sales). As for the number of shares outstanding, it has been stable for many years, which avoids any dilution of shareholders' equity.

Conclusion

The Japanese company has a history of over a century that speaks for itself. Despite a sector of activity subject to economic upheavals, the beta is surprisingly low (0.73). Certainly, the profit margin is small, but Narasaki still manages to generate profits and cash on a recurring basis. The company also maintains low expenditure on equipment requirements. In addition, many fundamentals are improving (liquidity, margin, debt).

I believe the stock price should double to reflect its intrinsic value and the dividend should do at least as well. That would bring us back close to the all-time highs from the early 1990s, before the Japanese bubble burst.

However, I cannot give a buy signal on this stock at this time, at least not a strong one, because of the weakness of the free cash flow margin compared to the total debt. As already mentioned, it would take nine years for Narasaki to repay all of its debt using its free cash flow, which I consider too long. However, we can see that the trend of the fundamentals of this company is clearly oriented positively. It is therefore a stock to keep under the microscope, or to hold if you already own it.