Daito Trust Construction is a Japanese company founded in 1974 and active in real estate and construction. It is the leader in its sector in its country, has 17,000 employees and is highly sought after by institutional investors.
Valuation & dividend
The title is valued quite correctly, with a price which amounts to:
- 11.5 times current recurring earnings
- 13.5 times average recurring earnings
- 3.81 times book value and tangible assets
- 0.65 times sales
- 27.92 times current free cash flow
- 19.04 times the average free cash flow
So we pay a little high for assets and FCF, but cheap for profits and sales. EBIT and EBITDA represent 13.63% of the enterprise value which confirms a rather interesting valuation of Daito Construction.
The dividend is particularly attractive, with a yield of 4.22%. The distributions are well covered in relation to profits, with a current ratio of 48.52% and an average ratio of 56.91%. The company also follows a very clear policy in terms of dividends and shareholder returns, with a targeted payout ratio of 50%, associated with share buyback programs representing 30% of net profit, which represents a total shareholder return ratio of 80%. In fact, we can see that the number of shares outstanding decreases each year, thereby increasing the share of the pie of the company's owners.
The chart below from the Daito Trust website is no longer entirely up to date but gives us a good representation of their approach:
Daito is therefore particularly generous with its shareholders, especially since the dividend, already high, has increased at a fairly sustained rate of 11,29% per year over the last five years. A small downside, however, is that while distributions are well covered by profits, they are much less so by free cash flow. The distribution ratio actually amounts to 117,74% compared to current FCF and 80,30% compared to average FCF.
Balance sheet & result
The dividend is growing over the long term, as are profits and asset values. On the other hand, cash reserves are gradually declining over time, which confirms the impression already left by the valuation based on FCF and by the fairly high dividend distribution ratio based on this same criterion. This partly explains why the price has struggled to take off over the past five years.
Even though they are down, liquidity remains good, with a current ratio of 1.67 and a practically identical quick ratio. The gross margin is quite low, with 18.6% (down). The margin is not huge either, with 5.65%, but it is especially the FCF margin, with 2.33% which leaves something to be desired and explains the various observations already made above. On the profitability side, however, it is much better, with an ROA of 10.46% (a very slight increase), a CFROA of 8.37% and an ROE of 30.04%.
Debt is well under control, with a long-term debt-to-asset ratio of 8.48% (declining). Daito would be able to pay off its entire debt in less than two years using its FCF. It is also worth noting that debt is only 0.31 times equity.
Conclusion
Daito Trust is a Japanese real estate and construction giant. Its shareholder return policy is clear and responsible. The company is profitable, financially sound, with debt under control and sufficient liquidity, even if it has had an unfortunate tendency to decline in recent years. The Z-Score (Altman), with 4.22 (green zone), confirms that Daito is not ready to go bankrupt. The F-Score (Piotroski) is not too bad either, with 6 points out of 9.
The title is not very sensitive to market fluctuations, with a beta of only 0.13, which does not prevent it from being quite volatile (30.81%).
I have to say that Daito's shareholder return policy is particularly attractive, especially since the stock is fairly valued (at least relative to earnings and sales). On the other hand, the low FCF margin and declining cash flow raise some questions about future dividend growth.
So for now I'm neutral, but quite tempted.
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Great analysis, thank you! I also think this stock is worth following. The dividend is very interesting and seems relatively safe to me. On the other hand, it is true that the free cash flow raises some questions.
THANKS
I have a series of Japanese titles up my sleeve.
More info coming soon.
Indeed, very good allocation of capital with a return to shareholders creating value via share buybacks for cancellation and regular dividend increases.
Apart from this very positive point, the valuation is high (equity multiple, EV / EBITDA, FCF multiple and earnings multiple). There is, in my opinion, better to do on the Japanese market.
Yes I agree. Other values analyzed very soon.
For example in construction: Daiichi Kensetsu (1799).
Worth half its equity, 7x FCF and 9x 2018 earnings. Low debt.
2%'s dividend yield is likely to increase.
EV / EBITDA = 1.2x.
Cheaper than Daito Trust Construction, but shareholder returns need to improve.
Cool thanks for the tip, I'll look into all that.
Cheap indeed, but I've tried to be more flexible with the liquidity, but there's still quite a journey there... current and quick ratio >6!
Unless there is an exceptional dividend or a buyback, I don't see how all this cash can be passed on to shareholders?
Correct: a dividend or a share buyback. Or even an acquisition?
What is your target ratio on liquidity? From a certain amount, you seem to prefer less liquidity… Personally, I see it as an anti-crisis asset, not a risk.
On the contrary, you see these excess liquidities more as a management problem: "too cautious". Interesting.
Yes, as always, the difference is in the nuance. Too little liquidity, danger. Too much liquidity, company either too cautious or lacking inspiration…
A current ratio between 1.5 and 3, or even slightly more, pleases me. Afterwards, you have to look at the overall picture and temporize with other criteria. Some companies can get by very well with very little cash, while for others a little too much, if it is temporary, it is not so bad. But if the excess liquidity is really enormous and/or has lasted for a long time, I tell myself that there is still a problem somewhere. I know that Graham was looking for current ratios higher than 1.5, or even 2, and we understand why, but from a certain level I find that it becomes exaggerated. But maybe I am wrong. Do you have good experiences with very high current ratios, like higher than 4? Like special dividends, share buybacks or acquisitions?
Hi Jerome,
Extreme discounts are my thing. I've been making a lot of money with these types of stocks for years (see the blog). All my assets are invested in the stock market.
On the other hand, I'm just starting out with Japanese stocks. And current ratios of 4x and more are rare, especially for profitable companies!
Here is my opinion: think in terms of baskets. Buying overcapitalized companies can only present long-term advantages. Because they can weather crises and have the ability to suddenly make a good decision: dividend, share buyback, company buyback, delisting, etc. that more indebted companies would have difficulty doing.
Companies with abundant cash that accumulate have the disadvantage of less well allocating their capital. But I prefer an accumulation of cash to an accumulation of debt! The real risk, and you have identified it, is that nothing continues to happen = an opportunity cost risk. To counter this risk, buying a basket of 20/30 shares of companies of this type allows you to capture the good students. And then… at some point, the market will realize that valuations are disconnected from assets (especially when it is so easy to calculate with essentially cash!).
My point of view: it's like knowing that you're going to inherit capital that only grows. You don't know when you're going to get it, but you know that it's going to happen. It's super comfortable and it allows you to sleep well since your treasure continues to grow... even if you have no visibility on the return date.
Well, we agree, the ideal is to have management that increasingly returns the company's cash (dividends + share buybacks) without jeopardizing the company's ability to invest to generate growth.
We are here on problems that are still incidental I find: companies that have too much cash! 😉 But we have the means to ask ourselves these "rich people's questions" so abundant are the nuggets on the Japanese market.
Occasionally, send me an email to discuss our respective portfolio titles.
Yeah it's true that these are rich people's problems 🙂 and it's also true that the Japanese market is incredible!
Whether to accumulate or profit from wealth, ultimately companies ask themselves the same questions as we do.
The discount-type approach you are following seems to be based primarily on capital, whereas the dividend approach followed here is based on cash flows.
Ultimately the two are similar, it's just the time and frequency that sets them apart.
I must say that this idea of capital that we are going to inherit and that only grows appeals to me quite a bit too. I am going to think about it.