Sumiken Mitsui Road Co Ltd (1776:TYO) Analysis

Sumiken Mitsui Road is a Japanese company that we have already studied in fall 2017As a reminder, this company has been active in the construction sector in Japan since 1948.

Valorization

Despite a rise in the share price of 10% since our last analysis, Sumiken Mitsui Road still remains extremely cheap by any measure. Indeed, it is trading at

• 6.78 times current recurring earnings
• 6.64 times average recurring earnings
• 0.66 times tangible assets
• 0.19 times sales
• 6.62 times current free cash flow
• 9.02 times average free cash flow

The company is so cheap that its enterprise value is negative. This means that the stock is currently trading for less than its cash reserves. In other words, you can buy yen at a discount...

The dividend yield is correct, with 2.24%. A priori it is not extraordinary, but it is explained by an ultra-conservative distribution ratio of 15% compared to profits and compared to free cash flow. Sumiken Mitsui Road therefore has substantial room to increase its shareholders' income in the future. It has not deprived itself of doing so in the past, at an impressive average annual rate of 21.67% (over the 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 solidity of the Japanese manufacturer's business model. Sumiken clearly succeeds in creating value for its owners, and this is reflected in the share price which has almost quadrupled over the last ten years.

Cash reserves are good, with a current ratio up, at 1.43, and a quick ratio of 1.37. The gross margin is however low, at 10,76% (a very slight decrease). Logically, the net margin and free cash flow are also small (2,79%, resp. 2,85%). Profitability is barely better, with an ROA of 3,66% (down), an ROE of 9,67% and a CFROA of 5,47%.

From a debt perspective, however, it is much better, since the debt is simply non-existent.

The number of shares outstanding is stable, which avoids any dilution of shareholders' assets.

Conclusion

Sumiken Mitsui Road is really very cheap. No analysts on the horizon, very few institutions, this small company of 486 people vegetates in the no man's land of the stock market. It is so neglected that you can actually buy cash at a nice discount.

Certainly, it is not a monster of profitability. The margin is low, the overheads are quite high, as are the capital expenditures. With Sumiken we are certainly not in the school of Warren Buffett.

Nevertheless, the small Japanese construction company is solid, which is corroborated by the absence of debt, an F-Score (Piotroski) of 7 and a Z-Score (Altman) of 2.4. These two indicators tell us that Sumiken not only has a low "chance" of going bankrupt, but also, thanks to the F-Score, that its stock is likely to outperform the market.

I believe that the price should at least double to reflect the intrinsic value of the Japanese company. The dividend should do at least as well. The buy signal is therefore still as strong as ever.