DMS Inc (9782:TYO) Analysis

Today I'm going to tell you about DMS, a very small Japanese company with only 300 employees, whose origins date back to 1920. DMS offers shipping and sales promotion services.

Valuation & dividend

The stock is trading at an attractive price of:

• 11.47 times current recurring earnings
• 14.39 times average recurring earnings
• 0.42 times sales
• 9.07 times current free cash flow
• 14.70 times the average free cash flow.

EBIT and EBITDA represent 14,70% of the enterprise value, which confirms the attractive valuation of DMS.

The average investor who would stop at the dividend of this company would risk very much passing his way, since the yield amounts to only 1.09%. However, if we look more closely, we see that DMS applies an extremely conservative policy in terms of distribution of its profits. Indeed, the dividend represents only:

• 12.81% of current recurring profit
• 15.70% of average recurring profit
• 9.90% of current free cash flow
• 16.72% of average free cash flow.

The company therefore has enormous room to continue paying and, above all, to increase its dividend in the future. In the past, it has done so at an average annual rate of nearly 7% (last five years).

Balance sheet & result

Just like the dividend, the profit, cash reserves and asset values are growing over the long term, which proves the solidity of DMS's business model. The company is clearly managing to create wealth for its shareholders and this is reflected in the share price, which has increased sixfold in ten years! This is all the more remarkable given that the share price remains as cheap as ever.

Cash reserves are good, with a current ratio of 1.90 (up) and a quick ratio of 1.66. The gross margin is not huge, with only 9.9% (but up). The net margin is of the same ilk, with 3.56% and the FCF margin slightly better, at 4.61%. In terms of profitability, we are also in a similar configuration, with an ROE of 8.3%, an ROA of 5.72% (up) and a CFROA still significantly higher, at 9.41%.

Debt has been steadily declining for many years and is very low indeed. Long-term debt to assets ratio is only 3.26% and total debt is only 0.06x equity. DMS could wipe out all of its debt in just one year with its FCF.

The number of shares outstanding has also been stable for several years, which avoids any dilution of shareholders' assets.

Conclusion

Of course, DMS does not have huge margins and is not a monster of profitability. But its ability to regularly generate cash and profit, in addition to its liquidity reserves and its almost total absence of debt, make this company very solid. This is confirmed by an F-Score (Piotroski) of 9 points (out of 9 possible), which is very rare. The Z-Score (Altman), with 4.3 (green zone), also indicates that this company can be considered safe and therefore not ready to go bankrupt.

This micro-cap is almost non-existent in the world of investors. The only institutional investor that is really present is the essential Fidelity, with 6% of the capital. For the rest, it is practically a no man's land. Another quality of DMS is its relative insensitivity to the market, with a beta of 0.68. On the other hand, despite this, the volatility is very high, with 38% of relative standard deviation. In my eyes, this is actually the only real black spot of this little gem. Even there, it has nothing to do with the company itself, but rather with respect to the "risk" perceived by the investor, depending on his personality, which could lead him to act irrationally.

I estimate that the price should rise by around 30% to reflect the intrinsic value of the stock. The dividend should do at least as well, if not much more, given the very low payout ratios.

So I have just taken a position on this very good value.