Murakami Corp. (TSE:7292, Financial) looks undervalued.
Murakami is an industrial company with more than a century of business operations. According to the company’s website, it has three business segments:
- Automotive mirror systems appears to be the most important business.
- Opt-Electronics is a new business and represents an effort to leverage the company’s automotive mirror systems expertise to enter into other related markets.
- Other Businesses are a variety of endeavors including glass construction materials, sale of raw materials for resin, logistics, transport and temporary staffing.
The company’s businesses appear mature. Growth has been moderate in recent years.
The balance sheet appears very strong. As of the most recent quarter, the company had 47 billion yen ($430.9 million) of equity supporting 67 billion yen assets. Liquidity was excellent with a current ratio of 2.9.
The company has 13.1 million shares outstanding. Cash per share is 1,601 yen as of the most recent quarter. This compares very favorably to a stock price of 1,910 yen on Nov. 14.
The company’s businesses produce solid cash flow over time. Cash from operations is about six billion yen per year. Capital spending on property, plant and equipment is about four billion per year, leaving free cash flow of about two billion per year (approximately 150 per share).
The valuation appears compelling. The price-to-free-cash-flow ratio (P/FCF) is about 13 if one uses the results for the past five years. If one deducts the value of cash from the stock price, the P/FCF ratio falls to just 2x – very compelling in our opinion.
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, Murakami 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. They 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 seem reasonable in the low double-digits. Based on these returns, we believe there is a reasonable case for the company to reinvest in its core businesses. However, we think buying back stock at these levels is a better use of the shareholders’ money. The company appears to be doing so, but at a very slow pace. Perhaps they will step up the repurchases in the future.
One can buy Murakami through a broker like Interactive Brokers.
This article is information purposes only. It is not investment advice nor an offer of investment advice. The author does not currently have a position in the stock.
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