Sumiken Mitsui Road Co Ltd (1776:TYO) Analysis

This is the second update of my analysis of Sumiken Mitsui Road, a Japanese company active in the construction sector since 1948.

Valuation & dividend

The title is really very cheap, with a price that amounts to:

• 6.42 times current recurring earnings
• 6.56 times average recurring earnings
• 0.63 times book value and tangible assets
• 0.19 times sales
• 4.85 times current free cash flow
• 8.45 times the average free cash flow

The company is so cheap that its enterprise value is negative. This means that the stock is currently trading for less than its cash reserves. In other words, you can buy yen at a discount...

The dividend is quite interesting, with a yield of 3.11%. This is all the more remarkable since the company only distributes a tiny part of its result. Indeed, the dividend amounts to only:

• 20.00% of current recurring profits
• 20.42% average recurring profits
• 15.10% of current free cash flow
• 26.29% of average free cash flow

Sumiken therefore has substantial room to continue to ensure the payment of its dividend in the future, and above all to increase it, as it has already done in the past, at a very sustained average annual rate of 30,83% (over the last five years).

Balance sheet & result

Just like the dividend, profits, asset values and cash reserves are growing over the long term, which proves the solidity of the business model of this Japanese micro-cap. Sumiken clearly succeeds in creating value for its shareholders and this is reflected in the share price which has more than quadrupled over the last ten years.

Cash reserves are good, with a current ratio of 1.52 (up) and a practically identical quick ratio. Margins, on the other hand, are quite low, with a gross margin of 10.9% (up slightly), a net margin of 3% and a free cash flow margin of 4%. In terms of profitability, it is quite similar, with an ROA of 3.94% (up), a CFROA of 5.98% and an ROE of 9.78%. These fairly modest figures should nevertheless be put into perspective by an insignificant debt. Furthermore, the number of shares outstanding has been stable for many years, which avoids any dilution of shareholders' equity.

Conclusion

Sumiken Mitsui Road is a very small company with only 480 employees. It is off the radar of analysts and institutional investors. Only Fidelity is present there with 4% of the capital and, in the same proportions, Horizon Capital Management, a company from the Geneva market.

The title is not too volatile (17%) and not very sensitive to the market, with a beta of only 0.4.

The company, despite its rather modest profitability and margins, is debt-free and financially solid. This is confirmed by an F-Score (Piotroski) of eight out of nine, which is rare enough to be highlighted. Let us recall that this score is often a good indicator of the future performance of a stock. The Z-Score (Altman), with 2.48, places Sumiken in the gray zone, i.e. no absolute security, but no immediate risk of going bankrupt either.

I believe this stock is significantly undervalued and should at least double to reflect its intrinsic value. The dividend should do at least as well. I bought it in October 2017, making a gain of 30%. Considering that it is still a buying opportunity, I have just bought myself a slice of it again, which I very rarely do.