Analysis of A&A Material Corp (5391:TYO)

A&A Material Corporation is a Japanese company that manufactures and sells building materials and various industrial products. Its origins date back more than 100 years and it has 877 employees.

Valuation & dividend

The A&A price is enough to make us dizzy since it is trading at:

• 4.89 times current recurring earnings
• 6.88 times average recurring earnings
• 0.76 times book value and tangible assets
• 0.23 times sales
• 5.14 times current free cash flow
• 6.17 times average free cash flow

This very attractive valuation is confirmed by the following ratios:

• Current EV/FCF: 7.76
• Average EV/FCF: 9.31
• EBIT/EV and EBITDA/EV: 15.83

The dividend has also just been increased, which gives a very generous yield of 3.95%, even though the distributions only represent:

• 13.51% of current recurring profit
• 19.01% of average recurring profit
• 14.22% of the current FCF
• 17.06% of average FCF

The small company therefore has room to continue paying and increasing its dividend in the future.

Balance sheet & result

Just like the dividend, the cash, profit and asset value of the Yokohama firm are growing over the long term, which proves the solidity of its business model. A&A clearly manages to create value for its shareholders. Paradoxically, the share price has had a hard time taking off. In fact, it has only gained "75% over the last ten years, in the midst of the stock market frenzy. The price is still a third of what it was at the beginning of 2006 and even almost twelve times lower than in 1990! Nevertheless, in the last three months alone, A&A has just soared by 25%.

Liquidity reserves are not huge, with a current ratio of 1.24 (very slightly down) and a quick ratio of only 0.83 due to an inventory value representing almost a third of current assets. This could raise fears of a liquidity risk, but we will see more and more that if necessary, the banks have no reason to refuse a small temporary aid to A&A if necessary.

The gross margin is correct, with 23,99% (slightly up), for a free cash flow margin of 4,54% and a net margin of 4,78%. Profitability is quite interesting, with a ROA of 4,77% (up), an even better CFROA, at 6,46% and a ROE of 15,52%.

The long-term debt ratio to assets amounts to 5.65% (a sharp decline). The total debt has been steadily declining for several years and represents only 0.65 times equity. The company would need five years to amortize it using its free cash flow. The repayment of net debt has represented an average annual return of 8% for shareholders over the last five years. It should also be noted that A&A slightly reduced its number of shares outstanding between 2017 and 2018.

Conclusion

The total return to shareholders between the generous dividend, the equally remarkable debt repayment and the reduction in the number of shares has represented 10% per year on average over the last five years. This is all the more impressive since this was achieved at the rate of only 62% of free cash flow. The very small Japanese company therefore has the means to continue to improve its fundamentals while remunerating its owners. The Piotroski score, with a total of eight out of nine, confirms that A&A's financial situation is indeed improving very significantly. Let us recall that this indicator is often correlated with the future stock market performance of a stock.

Institutional investors are very little invested in the Japanese SME. Only a few Japanese investment companies and one American have small stakes. This probably explains why the price is struggling to take off further.

Be careful though, the title is very volatile (30%), with a fairly nervous beta as well (1.47). It is therefore not an investment to put in everyone's hands.

I believe that the price should double to reflect the intrinsic value of A&A and that the dividend should do the same. Yes, it is possible. It must be said that the stock has come from very far away. So I have just taken a position on this company.