Discover Wakachiku Construction Co Ltd: a comprehensive analysis of its growth potential and dividend yield

Wakachiku Construction Co Ltd (1888:TYO) is a very small Japanese company that has been active in construction and real estate since 1890.

Valuation & dividend

Wakachiku is trading at a very attractive price of just:

• 7.6 times current recurring earnings
• 9.54 times average recurring earnings
• 0.85 times tangible assets
• 0.23 times sales
• 5.04 times current free cash flow
• 14.23 times the average free cash flow

The EBITDA amounts to 28,69% of the enterprise value, which confirms the very attractive valuation of the title.

From a dividend perspective, the yield is quite generous, at 2.86%, for a very conservative distribution ratio of:

• 21.72% compared to current profits
• 27.25% compared to average profits
• 14.4% compared to current free cash flow
• 40.66% compared to average free cash flow

Wakachiku therefore has substantial room to continue to increase its dividend, as it has done regularly and sustainably in the past, at an average annual rate of 18.64% (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 company's business model. Wakachiku is clearly managing to create value for its shareholders, and this is reflected in the share price, which has tripled over the last ten years.

Liquidity reserves are good with a current ratio of 1.49 (very slightly down) and a quick ratio of 1.35.

The gross margin is modest, at 9.6% (a very slight decrease), which is also felt on the FCF margin (4.59%) and on the net margin (3.04%).

Profitability, on the other hand, is on the rise, with an ROA of 3,62%, an ROE of 11,18% and a cash flow profitability of assets of 6,08%.

The long-term debt to assets ratio is down to a conservative 2.38%. Debt is only 0.17 times equity and the company would be able to pay it off in less than 3 years using its average FCF.

Another interesting point for the shareholder: the number of shares in circulation has been stable for many years.

Conclusion

Wakachiku is a very small company with a very long history. It is trading at a very cheap price and is financially strong, thanks to low debt, fairly good profitability and low capital expenditure. The F-Score (Piotroski) of 7 confirms these good predispositions. As for the Z-Score (Altman), with 2.1, it is in the gray zone. Not absolute security, but not great danger either.

I believe the stock should double to reflect its intrinsic value, and the dividend should do at least as well. Note that the current price is 20 times smaller than the all-time high reached in 1989!

I took a position on this title at the end of June.