Shinnihon Corporation
Shinnihon (‘company’) is another construction business operating in
Japan. In addition to civil engineering and construction contract work (60% of
sales), it engages in purchase and development of properties (40% of sales).
It engages primarily in residential condominium construction but is also
engaged in contracts to build hospitals, hotels, dormitories, etc. It also develops
and rents office space. Management intends to strengthen its capacity in
logistics/commercial construction – with a particular focus on large-scale
steel frame construction.
The pandemic has disrupted activity in Japan’s construction sector. In
addition to sluggish demand, the company faces severe competition, and increasing
prices of construction materials and labour.
The company reported TTM sales (to September 2020) of 102.2b yen (FY 2020:
112.5b yen), ebitda of 13.1b yen (2020: 15.2b yen), and net profits of 8.9b yen
(2020: 10.5b yen). It generated average free cash flows of 11.9b/year.
It had substantial cash of 48.9b yen and strong current and liquid asset
ratios. The net current asset value is 63.2b. Adding in investment properties of
12.8b yen at market value, the minimum realizable asset value is 76b yen.
The stock is selling at 48.4b (828 yen/share), which is just 64% of
minimum realizable asset value, just over 5x depressed earnings, and 4x average
free cash flows. After backing out cash, the investor can obtain the
construction business for free.
Management have been stingy with dividend payouts – last year’s dividend
of 1.1b yen yielded just over 2% at this depressed price and is a fraction of
the cash balance. Management can do much better with payouts.
However, the return on tangible assets (net of cash) are excellent - exceeding
30% after tax. Considering the company’s strategy of not only waiting for
construction work but proactively acquiring real estate and developing it based
on demand and location (usually near transport stations), such excess cash is
likely to be put to productive use.
This stock appears to be selling considerably below its value to a
private owner – especially by quantitative standards.