Analysis of Broadcasting System of Niigata Inc (9408:TYO)

You may remember this tiny Japanese company I told you about just over a year ago: Broadcasting System of Niigata. Behind this gentle name lies an organization that has been active since 1952 in radio and television, as well as in the hotel, restaurant, construction and real estate industries.

Valuation & dividend

While the rest of the Japanese market follows a negative trend, BSN manages to hold its own. The share price had fallen during 2018, but recovered very well in the final months of the year. Despite this relative strength, BSN is still an extremely attractive stock. Indeed, it stands at :

• 11.24 times current recurring earnings
• 8.89 times average recurring earnings
• 0.38 times book value and tangible assets
• 0.29 times sales
• 3.39 times current free cash flow
• 4.47 times average free cash flow

It's really very cheap! EBIT and EBITDA amount to 19.12% of enterprise value, which clearly confirms that BSN is a very attractive opportunity.

If we focus solely on the dividend, however, we might get a very different impression, since the yield amounts to just 0.89%. The average annual growth in distributions over the last five years has been just 3.13%. These poor figures should be put into perspective, however, as BSN distributes only a tiny fraction of its profits to shareholders. The payout ratio is :

• 9,96% in recurring earnings
• 7,88% average recurring profit
• 3.01% of current FCF
• 3.97% of average FCF

The Japanese micro-cap therefore has substantial scope not only to secure its dividend in the future, but above all to increase it.

Balance sheet & result

One of the explanations for this very cautious payout ratio and slow dividend growth lies in earnings. Earnings have been on a downward slope for several years now. This is not catastrophic, however, as BSN has also managed to increase the value of its assets and its cash reserves. In spite of this weakness, the Japanese company still manages to create value for its shareholders, as can be seen from its share price, which has doubled over the last five years. The fickle nature of earnings is well known. If profits were to rise again, the impact on the dividend and share price would be immediate.

Cash reserves are very comfortable, with a current ratio of 2.34 (up) and a quick ratio of 2.29. Gross margin is quite good, at 26.6% (up), which unfortunately is not reflected too much in the net margin (2.55%). The free cash flow margin (8.46%) was a little better.

These figures confirm what we've already seen with the valuation ratios and the progression of earnings and cash reserves: BSN is very good at creating cash, a little less so at profits. In terms of profitability, we're in exactly the same scenario, with an ROE of just 3,38%, a CFROA of 8,40% and an ROA of 2,21% (down).

From the point of view of indebtedness, nothing to complain about, since the ratio of long-term debt to assets stands at 5% (down). All of BSN's debt, which has been falling for several years, could be wiped out with average free cash flow in less than two years. Moreover, debt represents only 0.15 times shareholders' equity. Now that's solid!

It's also worth noting that the number of shares outstanding has been stable for several years, which is a good thing for the shareholder who sees his share of the cake remain constant.

Conclusion

This tiny company with just 750 employees is completely off the institutional radar, which is one of the reasons for its attractive price. Volatility is still quite high, at 17.54%, but this is offset by a beta of just 0.59. This predisposition was highly appreciated in 2018.

The Z-Score (Altman), at 2.6, is in the grey zone. No absolute safety, but no imminent danger either. The F-Score (Piotroski), with 7 points out of 9, tells us that BSN is a very solid company. Remember that the F-Score is a good indicator of a stock's future performance.

I acquired this lovely specimen at the end of 2017, realizing a small 10% gain. I reckon BSN should almost double again to reflect its intrinsic value, and the dividend should do at least as well. I therefore intend to stay invested. Nevertheless, for the time being, I'm not going to strengthen my position, given that the Japanese market is still in a downtrend.