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.