Analysis of Kanemitsu Corp (7208:TYO)

KANEMITSU CORPORATION is a Japanese company that was founded two years after the end of World War II, in 1947, when Japan was still under Allied occupation. Kanemitsu started as a small local welding company supporting Japan's post-war recovery. At the time, the company's very first president was a young man of only 15 years old: Yukio Kanemitsu. The kid at the time was still in middle school, when he decided to throw his studies away to found his company. It turns out that he still holds the same position 71 years later!!! For that alone he deserves to be in the record books. But that is far from his only merit...

Kanemitsu now has 578 employees and is engaged in the design, development, manufacturing and sales of steel plate pulleys, especially for automobiles and agricultural machinery. Steel plate pulleys, the company's main product, are divided into four categories: single pulleys, double pulleys, poly-V pulleys and flat pulleys, according to the shapes and cross-sectional surfaces of belts used in automobile engines. They are then installed in water pumps, crankshafts, alternators, power steering, air compressors and voltage regulators of automobile engines. Using plastic forming technology from the development of pulleys, the company also develops and manufactures other automobile parts for airbags and transmissions, as well as gear products.

Valorization

Let's put it bluntly: the world of investors doesn't give a damn about this company. Not a single analyst or institutional investor in sight. It's like being stranded on a deserted and opulent island. What a dream! The stock is therefore obviously trading at a significant discount, at 7.2 times recurring earnings, 0.7 times tangible assets, 0.6 times sales and 7.86 times free cash flow. At this price, you'd expect to come across a lame duck, but that's not the case, quite the contrary.

Dividends appear modest, with a yield of only 1.86%, but this is explained by an extremely conservative distribution ratio of 13.3% compared to earnings and 14.6% compared to free cash flow. Kanemitsu therefore has a huge margin of safety for the payment of its dividend. In the past, it has regularly increased it, at an average annual rate of nearly 6% (last five years).

Balance sheet & result

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

Liquidity reserves are good, with a current ratio of 1.5 (up) and a quick ratio of 1.33.

The gross margin is also up, at 28%, for a net margin of 7.8% and an identical free cash flow margin.

Profitability is up, with an ROA of 6%, an ROE of 9.5% and a respectable return on cash flow from assets of 11.8%.

The long-term debt-to-asset ratio is derisory and falling sharply, at only 2.55%. The Japanese company would be able to pay off its entire debt in two years by using its free cash flow.

Finally, the number of shares outstanding has been stable for many years, which avoids any dilution of shareholders' equity.

Conclusion

Kanemitsu is a simple but devilishly efficient little business. Even though it produces for industries that are cyclical, it is relatively sheltered from economic and financial upheavals, which is confirmed by a beta of 0.7.

Above all, the Japanese manufacturer is completely off the market radar. The stock should at least double to reflect its intrinsic value (and that is still a very conservative estimate). The dividend should do at least as well.

So I just took a position on this nugget.