Analysis of Ebara Jitsugyo Co Ltd (6328:TYO)

EBARA JITSUGYO CO.,LTD. is a very small Japanese manufacturing company with 460 employees. It has been operating since 1946 in three business segments. The Environment segment manufactures and sells ozone densitometers, ozone application equipment, deodorization equipment, infectious disease control measures, aquaculture equipment, and waste sorting equipment. The Water Treatment segment is engaged in the design and construction of water supply and sewage facilities, as well as the provision of industrial wastewater treatment services. The Wind and Water Power Equipment and Thermal Equipment segment provides wind and water power equipment, as well as the sale, construction, and maintenance of thermal equipment.

Valuation & dividend

The Tokyo SME is trading at an unbeatable price:

• Current recurring P/E: 8.88
• Average recurring P/E: 12.25
• P/B and P/TGBV 1.14 times
• P/S: 0.49 times
• Current P/FCF: 5.23
• Average P/FCF: 11.44
• Current EV/FCF: 3.36
• Average EV/FCF: 7.35
• EBIT/EV & EBITDA/EV: 23,42%

The dividend is generous, with a yield of 3%, increasing at an average annual rate of 6% per year, even though it only represents a very small part of the results, namely:

• 24.7 % of current profit
• 34% of average profit
• 14.56% of current FCF
• 31.83% of average FCF

So there is room for the company to continue not only to pay it, but above all to grow it.

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 Japanese SME's business model. Ebara is clearly succeeding in creating value for its shareholders and this is reflected in the price which has almost doubled in the last three years.

Cash reserves are adequate, with a current ratio up to 1.4 and a quick ratio of 1.26. Although down slightly, the gross margin is correct, at nearly 26%. This translates into a net margin that is admittedly a little disappointing, at 5,47%, but into a much better FCF margin, at 9,27%. Profitability is good and improving, with an ROA of 6%, a CFROA of 11% and an ROE of 12.8%.

Long-term debt is almost zero and total debt is only 0.09 times equity! The company would be able to wipe it out in less than a year thanks to its FCF. Over the last five years, it has also reduced its net debt, generating a shareholder return of 3.45% per year on average. In the same vein, it has bought back its shares, also generating a shareholder return of 0.15% per year.

Conclusion

Between the generous dividend, share buybacks, debt repayment, the average annual total shareholder return over the last five years has been $5,87%, which is remarkable. It is all the more impressive given that this has been done within its means, thanks to its FCF (used for this to the tune of only $67%).

One of the strengths of this small company is its low capital expenditure requirement (21.6% of profit), which allows it to easily generate free cash flow. It is therefore not surprising that it has the means to self-finance in this way.

Let us also note that the company is financially solid, which is confirmed by an impressive F-Score (Piotroski) of 8 out of 9 and a Z-Score (Altman) of 2.75 (gray zone). The latter certainly does not ensure absolute security, but does not evoke imminent risk either. Let us recall that Altman gives us a static view while Piotroski gives us above all a trend, which suggests that Ebara is rather heading towards the "peaks" than the opposite.

Be careful though, for heart-sensitive investors, the stock's volatility is high, with nearly 37%. Fortunately, the beta is only 0.85.

I acquired this gem 6 months ago, already making a small capital gain of 8%. I estimate that it should still very easily take a third of its current value and that the dividend should do at least as well.