In-depth analysis of Otec Corp (1736:TYO): growth prospects and investment strategies

I was telling you about Otec one year agoa small Japanese company active since 1948 in the sale of pipes, joints, valves, sanitary appliances and environmental equipment. It also handles instrumentation, electrical and maintenance work for new and existing buildings. It's time for a little update on the evolution of this company.

Valuation & dividend

Despite the rise in the share price since last year, Otec's valuation remains particularly attractive. In fact, the stock is trading at :

• 9.34 times current recurring earnings
• 11.24 times average recurring earnings
• 0.74 times book value
• 0.74 times tangible assets
• 0.43 times sales
• 7.84 times current free cash flow
• 9.87 times average free cash flow

These are very attractive figures. Add to this the fact that EBIT (and EBITDA) represent 37.61% of the enterprise value, and you really have confirmation that Otec is particularly cheap.

The dividend yield is decent, at 2.58%. This is all the more attractive given that the payout ratio is only :

• 24,11% recurring earnings
• 29.02% average recurring earnings
• 20,24% current free cash flow
• 25,48% average free cash flow

Otec therefore has a substantial margin to continue not only to pay its dividend, but above all to grow it further in the future. In the past, the Japanese company has in fact increased its distributions at a sustained average annual rate of 26,19% (over the last five years).

Balance sheet & result

Dividends are rising over the long term, as are profits, cash reserves and asset values. Otec is undeniably successful in creating value for its shareholders, and this is reflected in the share price, which has more than doubled over the last five years.

Cash reserves are comfortable, with a current ratio of 1.94 (down very slightly) and a quick ratio of 1.74. So no worries about paying the bills!

Gross margin is not too bad, at 20.4%, and above all, it's improving. The net margin is a little borderline, at 4.64%, and the FCF margin is barely above that, at 5.53%. Profitability is also at questionable levels, with an ROA of 4.48%, a CFROA of 6.32% and an ROE of 7.88%. Otec is certainly not a growth stock, nor is it in the school of Warren Buffett. But let's not confuse growth stock with price growth!

In terms of indebtedness, the situation is much more convincing. The ratio of long-term debt to assets is just 0.25%. This figure has even fallen since last year. Total debt represents only 0.09 times shareholders' equity. Otec could pay it off in just over a year using its FCF!

As for the number of shares outstanding, it is stable compared with last year, but increased slightly between 2016 and 2017.

Conclusion

Certainly, Otec isn't the sexiest company around, either in terms of its type of business or its profitability and margins. That said, it does have a number of advantages. Firstly, as we've seen, it's really not expensive, despite the obvious rise in the share price in recent years. The stock still clearly has the potential to double its price over the next few years (and with its dividend).

Secondly, the stock is extremely defensive, with a volatility of 8.29% and a beta of 0.57. Always a good bet these days.

Finally, despite its low profitability and margins, Otec is a solid company. Debt is almost non-existent. Cash flow is comfortable. The company has a 70-year history. The Z-Score (Altman) is in the upper gray zone, at 3.0, and the F-Score is also in the upper mid-range, at 6. Again, nothing extraordinary, but far from catastrophic. In any case, nothing to jeopardize the immediate business of this small Japanese company.

I've made a gain of over 20% with Otec since my purchase last year, and it's a stock I'm definitely going to hold on to, despite the current stock market turmoil. It remains to be seen whether this is still a stock to consider buying, or to strengthen an existing position. If market conditions weren't so tense, I'd say yes without hesitation. But in view of the uncertainties and the current trend, I think caution is called for.