Nankai Plywood Co Ltd (7887:TYO)

Recent Share Price: ¥5900

Accounting: Japanese Accounting Standards

Fiscal Year: Mar. 31st

Market Cap: ¥5.9 billion ($52 million)

Industry: Basic Materials / Hardwood Veneer & Plywood

Although it’s not too difficult to find Japanese companies trading below liquidation value, it is a bit tricky to find one with consistent revenue growth for over 10 years. From 2012, a conservative estimate of revenue growth for Nankai Plywood is a tad bit more than 5% per annum. I can hear the yawns already! But for an ultra cheap stock that’s a lot of revenue growth.

Nankai Plywood manufactures and sells primarily fabricated wooden materials for residential home use. On the side, they also sell electric wires and electrical equipment.

Following is a quick look at some highlights since 2012:

  • 2012: Opened factory in Indonesia
  • 2013: Launched new partition shelving FIXUS
  • 2014: Established NP ROLPIN in France and launched LIVUS
  • 2016: Closed office in Shanghai (opened 2011)
  • 2017: Launced “Storage Life NANKAI” and opened Tokyo showroom
  • 2020: Opened Nagayo showroom
  • 2021: Opened Osaka showroom

The downside on the revenue growth is that it has sucked up the excess cash flow to get there and then some. It reminds me of the Charlie Munger joke about all of the profits lost on the balance sheet.

We tend to prefer the business which drowns in cash – it just makes so much money that one of the main characteristics of it is the amount of cash coming in. There are other businesses, like the construction equipment business that my old friend John Anderson ran. He used to say: ‘you work hard all year, and at the end of the year there’s your profit – sitting in the yard.’ There was never any cash, just more used construction equipment. We tend to hate businesses like that.

Charlie Munger
Change in Working Capital ¥        -4,483,318,000  ¥        -8,578,483,000 
Net Income ¥         3,402,168,000  ¥         4,393,669,000 
D&A ¥         2,552,018,000  ¥         4,994,077,000 
Other non cash charges ¥            136,222,000  ¥         1,222,901,000 
Capex ¥        -3,963,172,000  ¥        -7,513,978,000 
Owner Earnings ¥        -2,356,082,000  ¥        -5,481,814,000 
Dividends ¥           -483,330,000  ¥           -831,744,000 

Usually, I’m more attracted to cheap stocks with a nice FCF yield. This one, on the other hand, offers little in that regard but does sport a stock trading at 1/3 of TBV with a 5-year and 10-year TBV growth of a bit under 3%, respectively. Profitability metrics are on the passable side. Gross profit to total assets is reasonable; it doesn’t knock the cover off the ball, but for this type of stock it’s not bad. The other negative, at least for me, is that 90% of revenue is domestic. I typically like to see more international exposure, but their presence in Western Europe is a plus.

On November 10th, the company announced full year (March 2022) forecasts of ¥20 billion in revenue, ¥1.8 billion in operating profit and ¥1.2 billion in net profit–all new company highs. So a forward P/E of around 5 with a history of revenue growth. It’s not bad. Life could be a lot worse.

Disclosure: We own shares in Nankai Plywood Co Ltd (7887:TYO). Leaven Partners, LP may hold any securities mentioned on this blog and may buy or sell these securities at any time.

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