Back in March, we at Urbem listed three UK stocks that, in our opinion, would qualify as Warren Buffett (Trades, Portfolio)'s "See's Candy" type of businesses - i.e. ones that can generate a super-normal return on capital, grow with minimal capital reinvested and afford to return the majority of earnings to shareholders.
In reality, such a dream business is a rare species. Fortunately, as we continuously turn over more and more rocks on a global basis, several companies came onto our radar in this regard, including the UK-listed names previously.
In this article, we take a look at three additional businesses from overseas stock markets that look similar to See's Candy in terms of generating returns for shareholders.
Nihon M&A Center
Nihon M&A Center (TSE:2127, Financial) is the largest independent merger and acquisition services provider in Japan. Unlike large financial conglomerates, the company specializes in the small- and medium-sized enterprise (referred to as "SME") segment, which, as the backbone of the national economy, employs nearly 70% of the total workforce in the country.
Nihon M&A Center has been benefiting from the megatrend of an aging population in Japan, which should continue to propel the growth of the company into the distant future. Internally, the management looks for reinvestment opportunities primarily relating to regional expansion, digitalization and adjacencies, all through a capital-light approach. Financial data shows that the company typically consumes less than 1% of sales to fund CapEx while more than doubling its operating cash flow and dividend payout over the last five years.
Softcat
Softcat (LSE:SCT, Financial) is the UK's leading reseller of a comprehensive range of infrastructure technology solutions from over 200 vendors (including all the major players like Microsoft (MSFT)) to enterprises and the public sector. We appreciate the company's "middleman" kind of business model, which mitigates risks resulting from technological disruption and generates robust cash flow with little CapEx requirement to grow.
The business indeed benefits from the digitalization megatrend. The management points to the people, skills and culture as a significant competitive edge to protect and even gain market share as well as a sole primary area for deploying retained capital. As with Nihon M&A Center, Softcat also spends less than 1% of total revenue as capital expenditure. The company paid out almost all of its net profit as regular and special dividends over the recent years. The operating income grew by 19% annually on a five-year average basis.
A2 Milk
Australia-based A2 Milk (ASX:A2M, Financial) engages in the commercialization of A1 protein-free milk and related products, which are believed by many to improve digestive health and reduce risks related to heart diseases and diabetes that are present with normal dairy products.
Over the last three years, the company increased its operating income by almost 100% a year on average, driven by international expansion (especially into China) and line extension (such as infant formula). At the same time, the business took in little capital through a capital-light model underpinned by manufacturing partnerships and valuable intangible assets, such as brand, proprietary technology and know-how in the niche.
It is worth mentioning that, unlike the other two in this article, A2 Milk does not pay a dividend. As a result, all the free cash flow has been accumulating on the balance sheet. Cash and cash equivalent accounts for 47% of the total assets as of fiscal 2019, significantly up from 7% in 2015. In terms of retained cash, the management expressed its intention to prioritize investment in initiatives, including a move to capital-intense manufacturing, to drive even further growth over the return of capital, which may lead to a higher risk profile of the stock in our opinion. Without such considerations, we believe that the company's current asset-light business model would be fully able to return the majority of its earnings to owners.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Nihon M&A Center and Softcat.
Read more here:
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