Kaneshita Construction (TYO 1897) - A Profitable Nanocap Net-Net Construction Company Trading at a 65% Discount to NCAV+Investment Securities

NCAV+Investment Securities are worth ~¥7,654 per share vs share price of ¥2,690. Company has bought back 42.5% of outstanding shares since 2009.

Source: Kaneshita Homepage

• Stock price: ¥2,690

• Book value: ¥8,526 per share (0.3x p/b)

• Market cap: ¥5.8 billion ($38.3 million USD)

• NCAV: ¥9 billion

• Investment Securities: ¥7.5 billion

• NCAV+Inv Securities: ¥16.5 billion (¥7,654 per share)

• Dividend: 1.8% (¥50 per share)

Kaneshita Construction is a small, overlooked net-net construction and civil engineering firm that’s been public since 1972. It’s highly illiquid, with barely any investor attention. There’s only been 19 Yahoo Japan message board posts in the last four years. Retail investors checked out a long time ago.

The core construction business isn’t exciting, but it’s been reliably profitable every year since 2013, with net income fluctuating between ¥45m and ¥503m over the last six years.

Net income by year:

• 2019: ¥188m

• 2020: ¥503m

• 2021: ¥45m

• 2022: ¥190m

• 2023: ¥270m

• 2024: ¥321m

• 2025 (forecast): ¥180m (forward P/E of 32)

Despite steady profits, the company is massively overcapitalized, leading to an abysmal 0-2% return on equity. The real story here isn’t earnings, it’s the balance sheet. Net current asset value (NCAV) alone is almost double the company’s market cap and there’s another 1.3x in market cap of investment securities on the balance sheet.

What’s the core construction business worth? No idea. Let’s assume it’s worth nothing. Let’s also write off all fixed assets including ¥1.2 billion in land as worthless. Even then, just the NCAV and investment securities are worth ¥7,654 per share, compared to today’s price of ¥2,690, a 65% discount.

The NCAV figure is clean and is comprised of almost entirely cash and accounts receivable:

Kaneshita Construction should have put more of its excess cash into investment securities, as those would have earned a decent return. This is why I like Takigami Steel Construction (TYO 5918). Their book value should compound faster than Kaneshita’s as there’s less excess cash sitting around earning near nothing. Still, Kaneshita is stupid cheap at these levels.

The top 3 equity positions disclosed by Kaneshita from their last securities report are the following: Kyoto Financial Group (TYO 5844), Raito Kogyo (TYO 1926), and Nichireki Group (TYO 5011). The value of these assets have increased significantly over the last few years. Their second largest holding Raito Kogyo announced on February 7, 2025 their own plan to increase shareholder returns and be more conscious of capital costs which led to the stock rallying 16%.

Buybacks and Capital Returns

Unlike many dirt-cheap Japanese stocks, Kaneshita Construction actually buys back shares. Since 2009, it has reduced outstanding shares by 42.5%, from 3.75 million to 2.15 million.

The last big repurchase was in early 2020 and was Black Clover selling their stake back to the company. While the repurchase was accretive, it wasn’t by much. Book value at the time was 6,800 and the company bought back the shares for ~5,090. The stock wasn’t attractive back then, but it is today.

Source: Koyfin

The disconnect between price and value today has widened significantly since the buyback in 2020. The stock price has drifted from ¥5,000 to ¥2,690 while book value per share increased from ¥6,800 to ¥8,500.

Is Activism Possible?

Unlikely. The company is just too small, and the Kaneshita family controls ~11% of the shares. The largest shareholder, Sei Shoji, is an associated company which was taken private years ago and is likely friendly with management. All of the largest shareholders including the banks and the employee stock association are also likely friendly with management. If we add these all up, about ~45% is friendly with management.

Kaneshita Construction is also Kyoto based, which is even further behind than Tokyo based companies in governance reform. Steel Partners, a U.S. based investment company, did own shares 20 years ago but has since given up. The company is significantly cheaper today than it was back then. The Tokyo Stock Exchange reforms are also a tailwind today. Even Kyoto based companies are slowly getting on the shareholder return bandwagon.

I think the company will eventually be taken over by management in an MBO. It could also do nothing and drift around for another decade. 20 years ago in early 2005 Kaneshita Construction’s stock price was almost exactly the same price as today. While book value did increase from ¥6,150 to ¥8,564 since, this is a terrible 20 year return. If they invested their excess cash in investment securities or real estate, they would have done a lot better.

Risks:

The biggest risk? Management making a dumb move. But given how conservative most Japanese companies are, that’s unlikely. Still, that didn’t stop them from opening a conveyor belt sushi restaurant last year. While this is almost certainly a waste of money, they only spent ¥203 million on it.

Cash-rich companies burning money on questionable acquisitions is nothing new. Take Oizumi (TYO 6428), a small-time Pachinko machine manufacturer that went on a bizarre diversification spree—buying into protein bars, gummy snacks, supplement manufacturing, and even alcoholic beverages.

Many overcapitalized Japanese companies at least park excess cash in real estate, which tends to be a better move than letting it sit idle. But blindly scooping up random businesses with zero synergies? That rarely ends well. And sure enough, Oizumi’s stock is down 26% over the past year.

Cheap could also stay cheap a lot longer. Kaneshita Construction has been cheap for a long time (outside of the 2009 financial criss though its never been cheaper). The two ways to win are either the company finds religion on shareholder returns due to TSE reforms or they take themselves private. Absent that, Kaneshita could stay cheap for another decade or more.

Conclusion:

I own some Kaneshita Construction as part of my cheap Japanese basket. Sizing is a typical basket position. There’s no reason this company should even be public. It’s a small-time construction business trying to diversify into conveyor belt sushi. Management should just take it private.

I’m not greedy. NCAV + investment securities are worth ¥7,654 per share. I’d happily take ¥5,000 in a buyout. That would mean management getting the entire operating company for free, plus ¥2,654 per share in excess cash and securities. An 86% premium to my cost basis? Sounds like a win-win.

Thanks to Value Trapped (@TheLongHappy) for bringing this name to my attention.

Updated with some additional context around activism thanks to Travis Lundy

Disclosure: I own shares in Kaneshita Construction (TYO 1897). The security could be sold at any point in time without prior notice. This is a small position as part of a broader basket of cheap Japanese companies so I haven’t dug too deep into this name. If I missed anything important, feel free to share in the comments. None of this is investment advice. Everything in this post is my own opinion and I could be wrong. Do your own due diligence.