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Pegasus (45% Profit in 5 months)

Updated: Sep 17, 2022

Pegasus Sewing Machine Manufacturing Co. Ltd. (‘company’) is engaged in manufacturing industrial sewing machines for use in the apparel industry (80% of revenues); and die-casting parts for use in automobile safety belts (20% of revenues).

The company specializes in ‘chain sewing’ machines used in garment factories for sewing jeans and other knit clothing – and is a leading operator in Japan.

Its die-casting parts manufacturing facilities are located in the three major automobile parts production hubs – China, Vietnam, and Mexico – to service American and European automobile manufacturers.

The company sells its products across the world in Japan (8% of sales), China (21%), Bangladesh (13%), Rest of Asia (32%), Americas (16%), Europe (7%), and others (3%). Its manufacturing facilities are spread as follows: Japan (46%), China (29%), Vietnam (12%), Americas (11%), and others (2%).

The US-China trade dispute and resulting protectionist measures hit the apparel industry badly and capital investment from the garment factories stalled as their attention turned to disposing their inventories. Further, the coronavirus pandemic shut apparel retail stores and further dampened demand for the company’s products. The die-cast parts business was affected by reduction in automobile manufacturing during this period.

The company reported TTM sales of 12.2b yen (FY19: 18.9b), ebitda of 870m yen (FY19: 2.9b), and net losses of 277m yen (FY19: 2.1b profit). Average earnings were 1.2b yen - and the company reported net profits of over 2b yen in three of the last five years.

The balance sheet was strong with excess cash of 2.3b yen and net current assets (including securities at market) of 11.7b yen. The current and liquid asset ratios were more than adequate.

The stock is currently selling for 8.7b yen, which is a 26% discount to liquidation value, and just over 7x
average earnings.

Management have committed to paying 30% of profits as dividends and they have maintained consistency through the recent period of losses – TTM dividends yielded just under 6% at market.
Recent returns on equity are mediocre – but management aims for 8% returns in the future.

Apart from meeting our quantitative tests for investment, we think this is aided by the following qualitative considerations: long-term demand for garments and automobiles appears to be stable and growing; and the company occupies a leading position in its field. This should enable it to return to former performance levels when demand recovers.

Therefore, we consider this stock to be a reasonably attractive bargain purchase.

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