Analysis of Kyowa Leather Cloth Co Ltd (3553:TYO)

KYOWA LEATHER CLOTH CO., LTD. is a Japan-based company that has been active since 1935. It is mainly engaged in the manufacture and sale of various leather products, such as car interiors, wall coverings, home furnishings, footwear and industry. I analyzed this value a year ago, let's see how his situation evolved.

Valuation & dividend

This tiny Japanese company is currently trading at a very attractive price. This was already the case a year ago, and it is even more true today. Kyowa Leather is trading at:

• 8.94 times current recurring earnings
• 8.99 times average recurring earnings
• 0.44 times sales
• 11.67 times current free cash flow
• 16.35 times the average free cash flow

The EBIT amounts to 21,60% of the enterprise value (EBITDA 23,06%), which confirms these extremely attractive ratios.

The dividend is not left out, since the yield amounts to 3.58% which is rare for a quality company in these times. In addition, the distribution ratio is particularly prudent:

• 32.00% compared to current recurring profits
• 32.17% compared to average recurring profits
• 41,76% compared to current free cash flow
• 48.85% compared to average free cash flow

The small Japanese company has therefore put all the chances on its side to not only continue to pay its distributions, but also to grow them. Kyowa Leather has not hesitated to do so in the past, at a sustained average annual rate of 19,74% (over the last five years).

All the lights are therefore green from the point of view of valuation and dividend.

Balance sheet & value

Just like the dividend, profits and asset values increase over the long term. On the other hand, cash reserves tend to stagnate or even decline slightly. The company manages to create a certain value for its shareholders over the long term, which is reflected in the share price, which has doubled over the last five years.

Despite the slight drop in cash reserves, they are still quite comfortable, with a current ratio of 1.52 (down) and a quick ratio of 1.28. So not too much of a problem paying the bills.

Margins are not extraordinary, with a gross margin of 19.9% (slightly down), a net margin of 4.9% and a free cash flow margin of 3.75%. Same story for profitability, with a ROA of 4.48% (down), a ROE of 7.73% and a CFROA of 8.65%.

It's a completely different story from a debt perspective, as the long-term debt-to-assets ratio is only 0.32% (down). Debt is 0.02 times equity and could be wiped out in half a year using free cash flow.

Another interesting point is that the number of shares outstanding has been stable for many years, which avoids any dilution of shareholders' equity.

Conclusion

Kyowa Leather is a very small company but has a history of over 80 years. It also operates in a defensive sector, which is confirmed by a beta of 0.68 and a volatility of only 4.43% over the last year (which is already an achievement given the upheavals that there have been on the market).

Of course, the company is not a monster of profitability. This "flaw" nevertheless gives it the advantage of not attracting new competitors en masse. In the same vein, Kyowa leaves analysts and institutions cold, which is certainly a good point, especially for contrarian investors. This ability to be off the radar, associated with its unsexy and defensive sector of activity, make the Japanese Tom Thumb a stock that we appreciate in turbulent weather and that we could even forget in a corner for quite a while.

The Z-Score (Altman), with 2.6, places Kyowa in the gray zone. No strong guarantee of security but no imminent risk either. The F-Score (Piotroski), with 5, confirms that we are in an average financial solidity with this title.

I bought Kyowa a year ago and I'm currently making a slight loss of around 5%. At the current price, the price should double to reflect the intrinsic value of the stock, and the dividend should do at least as well. So it's definitely a position to hold, but is it still a buying opportunity? I would say yes without hesitation if the trend was not bearish, like the market. But currently I prefer not to invest in new positions, at most to hold on to quality stocks (as long as they are not unscrew not).