Fukuvi Chemical Industry Co. Ltd. (TSE:7871, Financial) is one of those stocks that is just too undervalued to ignore.
Fukuvi is a diversified industrial company. Founded in 1953, it has stood the test of time. According to the company’s website, it has three business segments:
- Interior residence materials, exterior decorative materials and apartment building flooring systems.
- Resin parts used in a wide range of application such as residential equipment, office equipment, consumer appliances, etc.
- Manufacture and sale of precision chemical products, including artificial marble, precision resin products, etc.
The company’s businesses appear mature. Growth has been minimal in recent years.
The balance sheet appears strong. Here are the highlights as of June 30:
- Current assets: 32.108 billion yen ($311.23 million).
- Noncurrent assets: 12.337 billion yen.
- Total assets: 44.446 billion yen [ = (1) + (2) ].
- Total liabilities: 17.464 billion yen.
- Net current asset value: 26.982 billion yen [ = (1) – (4) ].
The company has 20.7 million shares outstanding. Thus net current asset value per share is 707 yen. The stock traded at just 486 yen on Monday. That’s a 31% discount to net current asset value.
The company has 10.726 billion yen in cash, or 518 yen per share. Cash per share exceeds the stock price.
The company’s businesses produce solid cash flow over time. Cash from operations has averaged more than 2 billion yen per year. Capital expenditures have been in the 800 million to 900 million yen range. Thus free cash flow is typically about 1.100 billion to 1.200 billion yen per year, or roughly 55 yen per share. The stock trades at just 8.8x free cash flow per share.
The stock has no obvious catalyst to trigger a significant revaluation in the near term. In addition, Japan’s subpar economic performance over the past decade or two is well known. However, change is afoot in Japan. The Stewardship Code of 2014 and the Corporate Governance Code of 2015 are encouraging Japanese companies to become more focused on improving shareholder returns. Management teams are increasingly accountable for taking proactive steps to improve returns. Major institutional shareholders are also increasingly accountable for exercising more vigorous oversight over the companies in which they invest.
With a strong balance sheet and a deeply undervalued stock, Fukuvi has some obvious opportunities to increase shareholder value:
- A stock repurchase program.
- Recapitalizing the company.
- Selling the company to a strategic buyer.
In increasing value for the shareholders, we would like to see management take advantage of the undervalued stock price. It could also simply increase the dividend – there is more than enough free cash flow to increase the payout by a significant amount.
By our calculations, pretax returns on net invested capital appear modest in the high single digits. Therefore, we don’t think the reinvesting in the business is the best use of the shareholder’s money – not while the stock is trading at such a low valuation. Therefore, absent a significant improvement in returns, we would view an aggressive increase in capital spending or a large acquisition skeptically.
Note: This article is not investment advice or an offer of investment advice.
Disclosure: The author does not have a position in any stock mentioned in this article.
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