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Elite Client Idea #34

Fujii Sangyo Corporation (TSE Ticker: 9906; Price: ¥1375/share)

Fujii Sangyo (‘company’) operates primarily as a distributor of electrical construction materials, device controls for industrial equipment, computer equipment/office supplies, and construction machinery - among other activities.

It generated sales from three segments: Material Innovation (52% of sales), Infrastructure Solutions (38%), Construction Machinery (8%), and others (2%).

It engages in some construction work such as concrete pumping, and road surface cutting - approximately 1/3rd of revenues is recorded using construction accounting.

The company is a sales agent for Panasonic Corporation for most of its product portfolio. It also has distribution agreements with Komatsu Group for construction machinery among others.

The company has experienced delays in product supply, and rising material costs but aggregate performance is remarkably steady with TTM revenues (ending September 2022) of ¥78.6b (FY22: ¥74.9b), ebitda of ¥3.9b (FY22: ¥3.8b) and net profits of ¥2.5b (FY22: 2.5b).

In addition to ebitda, there are recurring “non-operating” earnings of ~¥500m/year from purchase discounts, business consignment fees, etc. TTM net profits of ¥2.5b seems to represent normal earnings power for this diversified trading company.

The financial position is strong with net cash of ¥15.1b, net current asset value of ¥15.6b, and net tangible assets of ¥29.2b.

Inventories of ¥4.4b are somewhat higher than past levels relative to cost-of-sales but any markdown is more than offset by the market value of stocks (¥1.8b) in non-current assets.

Receivables appear to be under control and non-current assets are mostly composed of land, office buildings, and machinery.

The equity is currently trading for ¥11.6b, which is at a 25% discount to net current asset value, 60% discount to net tangible assets, and 4.6x TTM earnings.

The stock has traded ~50% higher on a price/tangible asset basis in the last three years.

Though this is a trading business, which should be valued at a discount to net current asset value – there appears to be enough in non-current assets for downside protection.

The earnings are generated from a diversified base, and the company has the flexibility to quickly adapt to changing market conditions by adjusting its purchasing.

Management does make bolt-on acquisitions from time to time but these don’t seem to break the bank, and there have been shrewd purchases generating negative goodwill. They seem to be focused on cost control and restructuring unprofitable offices.

Dividend payouts are reasonable with recent ¥55/share dividends yielding 4%.

This stock currently appears to meet our criteria for an investment purchase.

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