Thursday, January 1, 2015

Tachibana Eletech Splits Stock

Tachibana Eletech is having a good year operationally. After three quarters, the operating profits are on track to be 10% more than last year. And revenues are on track to be 5% more. However, management also threw in a surprise. They said the company will report an ¥ 62 per share extraordinary profit from acquiring Takagi Shokai Corporation. So, the company expects to a ¥ 204 per share profit for the year versus previously estimated ¥ 142. Takagi Shokai Corporation is a distributor of electronic components similar to Tachibana. Tachibana used to own 48% and recently paid ¥ 703M to increase the stake to 81%. Making Takagi Shokai now a subsidiary of Tachibana.

Price ¥ 1715.000
Market Cap ¥ 37044.77 M
($ 307 M USD)
P/E TTM 7.0 x
Div yield 1.3 %
P/BV 0.82
ROE11.7 %
ROIC 12.9 %
But how can a company make a profit from an acquistion you say? The reason is simple. Tachibana earned ¥ 1.6B of negative goodwill from buying Takagi Shokai Corporation. Goodwill is the difference between the cost of an acquisition and the book value of the acquisition. Typically, goodwill is positive because the cost is greater than the book value. This is the first time I have heard of a company acquiring another for less than book value. But while goodwill is normally kept on the book as an intangible asset, it isn't so if the goodwill is negative. It is recorded as income on the books.

Going from 48% to 81% ownership changed the treatment of Takagi on Tachibana's books, which prompted the negative goodwill. The goodwill includes all of the value above cost, including cost for the 48% ownership previously purchased. The bottom line is that Tachibana Eletech increased its book value by ¥ 1.6B from this transaction.

Management also announced that they will do a 5 to 6 share split in April 2015. It seems like a rather odd thing to do. Maybe management feels the current stock price is getting too high and they want to lower it, but not too much.

Now I sense the company is doing something to increase shareholder value. This stock has doubled in the less than two years that I owned it in local currency. But in USD, it is up only 61%. That's one thing to keep in mind, the Japanese stocks and indices look great in the last two years but it is partly, if not mostly, due to the monetary easing by the Abe administration. And what works can also turn on you. If the yen strengthens, the market will probably tank. But I don't think too much about currency because it is almost impossible to predict. But regardless of the currency, I am very pleased to see the stock trading closer to book. And the company's balance sheet may also be understating the true book value as this acquisition shows. The company has small holdings in 30 other companies worth ¥ 8B. These holdings are carried at cost and may be worth much more. In any case, I feel that the book value is the fair intrinsic value for Tachibana. I will only consider selling when the stock reaches book value.

And finally, Happy New Year!

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