Analysis of Kamei Corp (8037:TYO)

Valuation & dividend

It's becoming increasingly rare to find cheap, quality stocks these days, so when I came across this stock I couldn't believe my eyes. The ratios seemed too good to be true. But it's all very real, with a price that amounts to:

• 6.24 times current recurring profit
• 6.02 times average recurring profit
• 0.42 times tangible assets
• 0.40 times book value
• 0.09 times sales
• 4.90 times current free cash flow
• 7.74 times the average free cash flow

It's like being in a German hard discounter, the prices are so low. This is confirmed by the other valuation ratios:

• Current EV/FCF of 8.45
• Average EV/FCF of 13.34
• EBIT/EV of 13.01%
• EBITDA/EV of 19.68%

The current dividend is certainly not extraordinary, with 2.3% but it is already announced to be increased for the next financial year (which actually brings us back to 2.5%) and above all it only represents a very small part of the company's results. Indeed, the distributions amount to:

• 14.43% of current profit
• 13.92% of average profit
• 11.34% of current free cash flow
• 17.90% of average free cash flow

Kamei therefore has a very substantial margin not only to continue paying its dividend in the future, but above all to make it grow again and again. In the past, it has also progressed very regularly, at an average annual rate of 13.3% (over the last five years).

Balance sheet & result

Just like the dividend, the profit, the value of assets and cash reserves are increasing over the long term, which proves the solidity of the Japanese company's business model. Despite this, Kamei's share price is struggling to really take off since it has "only" doubled over the last ten years. It must be said that the share price has lost almost half of its value over the past two years, with the 2017 and 2018 financial years being a little disappointing. This explains, among other things, why the share price is so cheap. However, the results are stabilizing and so is the share price.

Cash reserves are correct, with a current ratio of 1.34 (slightly up) and a quick ratio of 1.09. The gross margin is quite thin, with 14.9% (slightly down) and translates into a low free cash flow margin (1.78%) and a net margin of the same ilk, with 1.39%. This last figure in particular can explain the temporary difficulties encountered in 2017 and 2018. In terms of profitability, we are in a similar configuration, with an ROA of 2.77% (slightly down), a CFROA of 7.05% and an ROE of 6.48%. However, the modesty of this last figure should be put into perspective because Kamei's equity is quite significant, since it represents almost double the debt.

In addition, debt has been steadily decreasing for several years, with the company even managing to generate a shareholder return of 12,42% per year over the last five years, linked to the repayment of its net debt. This is quite impressive. It should be noted, however, that given the low FCF margin, the company would still need around ten years to repay the residual debt, which is obviously quite a long time. As for the number of shares outstanding, there is nothing to complain about, since it has been stable for many years.

Conclusion

Between the dividend and the repayment of net debt, Kamei has offered its shareholders a generous annual return of more than 14% over the past five years. Even if there has not yet been a notable effect on the price, it is certain that this improvement in fundamentals bodes well for the future. The company also has the means to continue to increase its dividend in the future, while further reducing its debt, despite a fairly tight FCF margin.

It is certain that the Japanese company is not a Buffett value, with low growth, profitability and margins, high overheads, declining goodwill, and fairly high capital expenditures. These seemingly unfavorable attributes do not, however, undermine Kamei's financial strength, which is confirmed by a Z-Score (Altman) of 3.01 (green zone) and an F-Score (Piotroski) of 7. We are thus closer to a Graham value, with a quality company trading at very cheap valuation ratios and therefore offering a significant margin of safety.

A small warning, however, for cardiac investors: Kamei is a very volatile stock (42%), with a beta slightly higher than the market (1.17). So handle with caution, or take a smaller portion than usual.

I believe the stock price and dividend should nearly triple to reflect the intrinsic value of the Japanese company. So I just took a slice.