Nisshin Group Holdings Co., Ltd. (TSE Ticker: 8881; Price: ¥441/share)
Nisshin (‘group’) is primarily engaged in the construction and sale of condominiums (‘condos’) in Japan.
It generated FY22 revenues from new condos (33% of revenues), used condos (4%), real estate securitization (12%), construction (45%), civil engineering (1%), real estate management (4%), and others (1%).
Demand for condos is expected to weaken due to increasing land and construction material costs. This, combined with a declining population, is expected to dampen sales.
The group reported TTM revenues of ¥81.6b (FY22: ¥81.5b), ebitda of ¥5.1b (FY22: ¥5.6b) and net profits of ¥3.3b (FY22: ¥3.5b). Earnings have averaged ~¥4b in the recent past and were steady over the last decade.
TTM operating cash flows were strained with outflows of ¥2b but aggregate cash flows over the business cycle are satisfactory.
The balance sheet (as at September 30th 2022) reveals a strong net cash position of ¥14.8b – cash of ¥51.7b offset by borrowings of ¥36.9b - this appears adequate to cushion near-term working capital requirements. (Borrowings are utilized to purchase land for the condos.)
The net current asset value stood at ¥51b, and net tangible assets were ¥63.2b.
Current assets consist largely of inventories of ¥23.1b at cost, and receivables of ¥22.9b.
Receivables (relative to sales) appear high when compared to the past and could pose collection risks. We’ve written it down by ¥11.7b (over 50%) to bring it down to former levels.
Inventories appear lower than past levels, and under control.
Adding in the market value of investments (~¥3.4b), and adjusting for receivable write-downs, we arrive at a minimum realizable asset value of ¥39.3b.
The equity is currently selling for ¥20.6b - a 48% discount to conservative asset value, 6.2x ttm earnings, and ~5x average earnings. Net of cash, the operating business sells for under 2x ttm earnings.
Dividend payouts are reasonable with recent dividends of ~¥1b yielding 5% at market.
The share price has been a laggard over the last five years. The group commenced a ‘board benefit trust’ incorporating share-based payouts for directors – but only on their retirement. Perhaps this will engage them to pay more attention to the share price.
Management intends to widen their product offerings to non-residential construction such as schools and nursing facilities – this doesn’t seem to be irresponsible diversification.
At such a deep discount to conservative asset value and earnings, and tolerable prospects, this stock appears to be an investment purchase at the current price.
