Sata Construction Co., Ltd.

Sata Construction (‘company’) is a small civil engineering and construction company operating solely in Japan. It generates about 1/3^rd of revenues from civil engineering work and 2/3^rd from construction orders. It also operates a small business selling asphalt.

The company wins a majority of its orders by competitive bidding (over 60%) with the balance under “special mission” contracts. The revenue split between government orders and the private sector is about 55%/45%.

Like other Japanese construction companies covered in this blog, the company is beset by a sluggish demand outlook - worsened by the consumption tax hike in 2019. It is also struggling with a shortage of skilled labor and rising material costs.

It reported TTM sales of 35.4b yen (FY20: 36.5b), ebitda of 1.9b yen (FY20: 1.7b) and net profits of 1.2b yen (FY20: 1.1b). Free cash flows averaged 1.1b yen/year over the last five years. However, management forecasts earnings of only 750m yen/year to 2023.

The balance sheet is overwhelmed by excess cash of 7.5b yen and strong current and liquid asset ratios. The net current asset value is 9.4b yen.

The stock sells for 6.8b yen, at a 28% discount to liquidation value - and 9x forecast earnings. Net of cash, the civil engineering and construction business is selling for free.

Normal dividends have averaged only 200m yen/year yielding 3% at market. Management’s cash hoarding is a definite negative. (However, there’s no shortage of cash bonuses and restricted stock compensation they award themselves.)

There doesn’t appear to be large capital expenditures on the horizon. Past returns on tangible assets (net of cash) have exceeded 10% and this wouldn’t be unacceptable if management can replicate the performance.

This business is undoubtedly operating in a harsh environment, but at the current price, investors appear to be getting their money’s worth in liquid assets and earnings.