Some Updates on the First Full Year of COVID

COVID hit most of the world starting in March 2020. So, many companies have (almost) had a year of impact from COVID. Many Japanese companies end their accounting year in March and thus their year coincides almost exactly with the start of COVID. So, their annual results will be able to tell us a lot about the true extent of the world's business slowdown.

Tachibana Eletech (TSE:8159) year end revenue is expected to fall 6.2 % to ¥ 160.0 B (2020 ¥ 170.5 B). Year end EPS is expected to fall 26.0 % to ¥ 128.8, (2020 ¥ 173.9), which implies a 13.0 x earnings multiple.

Riken Keiki (TSE:7734) Year end EPS is expected to fall 19.4 % to ¥ 150.5, (2020 ¥ 186.8), which implies a 20.4 x earnings multiple.

Takamatsu Machinery Co.,Ltd (TSE:6155) year end revenue is expected to fall 38.7 % to ¥ 13.4 B (2020 ¥ 21.9 B). Year end EPS is expected to fall to ¥ -12.7, (2020 ¥ 130.8).

Installux SA (PAR:STAL) H1 revenue fell 26.6 % to € 52.5 M (2020 € 71.5 M). H1 EPS fell 73.7 % to € 4.4, (2020 € 16.6). Their year ends in December.

In H1 2020, installux experienced shutdowns in their Spain and France locations and therefore revenues fell significantly. They were still profitable though. However, the company provided no guidance for H2 2020, so we don't know what happened in the last 7 months.

Installux is conservative, well-run, and highly profitable. They expand opportunistically and thus do not overpay for acquisitions. Their expansion has mainly focused on control of the supply chain. Their niche aluminum product offering remains unchanged. Still their sales figures are respectable. It has consistently risen by about 3.5% per year for the last dozen years. And of course they have no debt!

The company currently trades at 13 times 2019 earnings, the last full year of data before COVID. While this PE is not super cheap. The company looks much better when using the EV to EBIT ratio because it has no debt and ample cash. The company's EV is 7.2 times 2019 EBIT.

The coming challenges for the company is how to put its cash to use. The following figure shows the cash and equity buildup through the years. Note that in 2018, cash dipped and PPE rose by the same amount because of the acquisition of a factory in Spain.

The simplest way to get rid of cash is to pay generous dividends but management indicated it prefers not do do so to show solidarity with stagnant employee wages. I suppose this can partially explain why the company recently began share buybacks. So far the company has bought back 2% of the shares. 

Right now, I am really not sure whether I should hold Installux for the longer term, or reduce my position. At € 390, it is probably fairly valued. So, I'll just wait and see. Their annual report should out by April, then I'll decide.

Adding More Japanese Value Stocks

In the last entry I described my view that the way to win in this market is to arbitrage across time and markets.

I've described here that right now the US largecap market is the most overpriced ever. But many overseas markets are reasonable. I am quite heavily invested in Japan and South Africa. I feel quite strongly the coming decade is going to be all about emerging markets and value stocks.

Japan is a value country. It is a very developed country that has been heavily discounted for a generation. But, whereas in previous times Japanese companies mainly disregarded the minority shareholders, now they are much more generous. One can find dozens and dozens of companies that pay more than 3% dividends, and are growing dividends around 10%.

Yes, the persistent explanation for stocks being so cheap is the aging population and their ballooning debt. But look at the US. Their debt is getting up there, and the dollar is stronger than ever. And the same goes for the euro.

In March this year, the US market fell 35% off the peak. And I took the opportunity to add to my Japanese holdings. The table here shows the four stocks I currently own. The latter two I have had for 7 years. Both are up more than 3x when factoring in dividends.

	San	Takamatsu	Tachibana	Riken
Price	¥ 1234	¥617	¥ 1760	¥2402
Marketcap (M)	¥ 13820.80 ($ 127.38)	¥ 6663.60 ($ 61.42)	¥ 45760.00 ($ 421.75)	¥ 56687.20 ($ 522.46)
ROE %	6.8	9	6.3	8.7
PE	7.45	4.71	10.42	13.78
PTBV	0.51	0.42	0.66	1.27
Div Yield %	2.59	4.05	2.73	1.67
P/NCAV	‐	0.6	0.71	‐

I also added two new stocks. My main criteria are

• little or no debt
• high dividend yield
• growing dividends
• low PE

The first, is San Holdings (TSE:9628) a smallcap funeral home operator. One might think I bought it because of the recent coronavirus death toll. But not so. The funeral business is hardly a growing business. Coronavirus or no coronavirus, the death toll hardly changes from year to year meaningfully. There is one negative that concerns me. Management said that attendance is lower at funerals because of the dwindling population and cultural trends, This may result in less spending on funerals. I will be paying attention to the number of funerals and the total revenues in the future. But right now San Holdings is the kind of stock that I am looking for: stability during the market turmoil. Yet San Holdings is down 25% off the peak! That 25% is my margin of safey.

The other stock is Takamatsu (TSE:6155) , which is a small niche manufacturer of sophisticated lathes. Now I know very little about lathes in the same way I know little about funeral homes. But their products look very complicated and expensive, as seen below. And they must be very expensive. If there is anything we learned from the current crisis, it is that the coming decades we need to rely more on automation. We need automation to serve the sick and to reduce overcrowding in factories. When you have this kind of a backdrop and the company sells for less than 5x earnings and pays 4% dividends. That's all I need to know to decide to buy.

A reader may think my analysis is very simplistic. But I make no apologies! My analysis will never mention fancy terms like enterprise value (EV), bullshit earnings (EBITDA) or sharpe ratio. My investment theme is based on simplicity, as explained best by this video. I highly recommend watching it.

That's it for Japanese stocks. In my next post I will go into some other new stocks that I acquired during the recent crash. Right now is an exciting time to invest, and I've been busy!