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 is quite decent, with 2.2%, for a distribution ratio of only 18.8% compared to earnings and 36% compared to free cash flow. We can therefore see that even if we focus solely on cash flow (which, as we have seen, is paid slightly more than earnings), there is still plenty of room for Narasaki to continue to increase this dividend in the future. The Japanese company has not held back from doing so in the past, since distributions have increased by 12.5% per year over the past five years, following the earnings trend.

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.

Cash reserves are sufficient, but not huge, with a current ratio of 1.17 (still increasing) and a reduced liquidity ratio of 1.14. The Japanese company therefore has some latitude to meet its current financial obligations, but no more. The gross margin is not very large either, but also increasing, at 10.3%, for a net margin of only 1.7%. It is this last point that explains the very low price/sales ratio. The company produces a good turnover, but only a very small part of it is realized in profits. The return on assets is also quite modest and also increasing, at 2.85%, with nevertheless a return on equity of 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.