Analysis of Saftec Co Ltd (7464:TYO)

I introduced you to the Japanese company Safetec It's been a year already and it's time for a little update.

 Valuation & dividend

Despite the sharp rise in the price since last year, despite everything that has happened on the stock market, the stock remains very attractive. In fact, the price stands at:

• 10.16 times current recurring earnings
• 14.85 times average recurring earnings
• 0.87 times book value
• 0.88 times tangible assets
• 0.41 times sales
• 6.5 times current free cash flow
• 12.35 times the average free cash flow

In addition, EBIT and EBITDA amount to 12,03%, respectively 13,55% of the enterprise value. This confirms the still very attractive price of Saftec.

On the dividend side, it's not too bad either, since the yield amounts to 2,71% (an increase of 9,46% per year on average over the last five years). The company is prudent in terms of the money it distributes to its shareholders. Indeed, the dividend amounts to:

• 27.50% of current recurring profits
• 40.18% average recurring profits
• 17.60% of current free cash flow
• 33.42% of average free cash flow

Saftec therefore has a good margin not only to continue paying its dividend, but also to increase it.

Balance sheet & result

Just like the dividend, profits, cash reserves and assets are growing over the long term, which proves the solidity of the business model of this very small Japanese company. Saftec clearly succeeds in creating value for its shareholders and this is reflected in the share price which has more than doubled in the last two years.

Liquidity is correct, with a current ratio of 1.59 (down) and a quick ratio of 1.30. So there is little worry about paying the bills. The gross margin is very good, with 47% (up), with nevertheless a less attractive free cash flow margin and net margin, of 6,33%, respectively 4,05%. Profitability is also not extraordinary, with an ROA of 3,70% (up), a CFROA of 6,26% and an ROE of 8,59%. Let's look at the positive side, it is not this profitability that will attract many new competitors, especially since Saftec's activity (road signs) is not really the thing that the entire business world wants to rush into. As I mentioned in my last article, there are not many traders and institutions who are interested in this Japanese micro cap.

The long-term debt to assets ratio, at 12.76%, is quite high, although down from the previous period. Saftec would still need twelve years to repay its entire debt using its free cash flow. However, total debt represents 0.84 times equity, which is still within the reasonable range.

The number of shares outstanding has been stable, or even slightly down, for five years, which is good news for shareholders.

Conclusion

Saftec is a very small company, which already has a history of more than 60 years. It operates in a very defensive sector of activity, which is confirmed by a beta of only 0.53, for a volatility of 12.15%. There is certainly some potential for improvement, in terms of net margin, profitability and debt. The company is also in the process of taking care of these details, which can be seen in the F-Score (Piotroski), with eight points out of a possible nine. As for the Z-Score (Altman), it tells us that the Japanese company is, with 2.3, in the gray zone, i.e. no imminent risk, nor absolute security.

Net margin, profitability and debt are certainly points to consider, but research has proven that it is their evolution rather than their state as such that is important. This dynamic is given to us precisely by the F-Score, which is known as a reliable indicator of the future performance of a stock. Research has also demonstrated the very clear superiority of Piotroski compared to Altman. All this makes me say that Saftec has much more assets than it seems at first glance.

Despite the strong rise in the stock since I bought it last year (50%), I believe that the stock can still gain a third of its current value and that the dividend should do the same. I am therefore of course still invested in Saftec. Whether it is still worth buying is another question. The margin of safety is obviously no longer the same as it was twelve months ago. On the other hand, stocks of this quality and at this price are really very rare at the moment...