Daisue Construction Co. Ltd

Daisue (‘company’) is engaged in the civil engineering and construction contracting business in Japan. It focuses primarily on condominium/housing construction. It also owns 19.7% interest in an associate that specializes in industrialized housing; and has smaller interests in supplying manpower for security and nursing.

The company is long-established and has generated consistent orders and revenues through the years. The coronavirus pandemic resulted in suspension of orders, difficulty in obtaining building materials from China, and general interruption of construction activity. This resulted in 15% declines in sales over the year (to September) and 28% declines in operating profits.

It reported TTM sales of 60.2b yen (2019: 65.2b), ebitda of 2.5b yen (2019: 2.9b), and net profits of 1.7b yen (2019: 1.9b).

The cash balance was substantial at 7.6b yen and the net current asset value stood at 13.4b yen. Receivables were also substantial at 20.6b yen but doesn’t indicate a problem as evidenced by strong cash flows (see below). Gross borrowings were only 630m yen but the company had a borrowing line of up to 7b yen should the need arise.

Cash flows were also substantial with average free cash flows exceeding 3b yen/year.

The stock is currently selling for 9.2b yen, which is at a 30% discount to net current asset value and 3x free cash flows.

Recent dividends and buybacks totaled 413m yen, which yields 4.5% at market.

While the near-term housing construction prospects are weak, the stock market appears to be undervaluing this long-established company, which is in a strong financial position to withstand near-term difficulties and participate in the long future of housing construction in Japan as it has done in the past.