IJTT Co., Ltd. (‘company’) is engaged in manufacturing automobile parts – primarily for use in trucks and construction machinery.
Isuzu Motors – a prominent commercial vehicle and diesel engine manufacturing company - owns 43.5% of the company’s stock, and generates 69% of its sales.
Its sales are primarily generated in Japan (83% of 2020 sales – split further as 54% auto parts and 29% engine parts) with the balance from the rest of Asia (17% auto parts – primarily to China’s construction machinery market). Moreover, its tangible asset investment is split similarly - and includes operations in Indonesia and Thailand.
FY20 sales were actually higher than expected because of rushed buying before Japan’s consumption tax hike kicked in. However, the coronavirus pandemic has significantly diminished sales for the company’s products – and suspended production.
TTM sales (to September 2020) was 136.3b yen (FY20: 171.7b); ebitda was 6.4b yen (FY20: 13.9b yen) and net losses were 1.2b yen (FY20: 5b profit).
Normal sales appear to be 160b yen. Applying average margins and deducting taxes, which are slightly lower than Japan’s standard rate due to lower rates at overseas subsidiaries, we arrive at about 4.5b yen of normal earning power. Incidentally, these figures are within recent management targets for FY20.
The balance sheet is reasonably strong with net cash of 3.6b yen, which was reduced by additional borrowings taken up during the last six months. Further, the liquid asset ratio is satisfactory.
The stock is currently selling for 21b yen, which is under 5x normal earnings.
The company has been incurring large capital expenditures recently – to expand production capacity. The returns on tangible assets are anaemic at below 7%. However, the increased capacity does indicate management confidence in the future, and increased earnings. In fact, they’ve expressed a focus on expanding ASEAN sales, which shows promise of increased demand – particularly arising from infrastructure spending.
Though the latest dividend was reduced substantially, dividends in FY19 and 20 averaged 900m yen and yielded just over 4% at market. Pleasantly enough, management have also repurchased shares in FY20 for 600m yen at 677 yen, which is above the current price.
In addition to the qualitative position of the company (being ensconced in the Isuzu network), this stock appears to meet our quantitative tests for undervaluation.