Similar to Warren Buffett's Sanborn Maps, except cheaper and with potential for activism (#1 shareholder is an activist). NCAV+Securities+Rental Properties worth ¥18,000 / share vs ¥6,000 stock price
Worth emphasizing here: I know nothing about Black Clover or Evergreen’s intentions. I am only speculating. I don't even know who Evergreen is. My initial thought was it was connected to the family, but the sale was listed in the company's history section in latest securities report saying "Takigami Seiki Kogyo Co., Ltd. is no longer an affiliated company due to the sale of our shares", which made me assume they aren't connected to the family.
Great write-up but the way I see this is more as a cheap option on Japan - via the largest bank and one of the leading trading company, plus the rest for free - than an activist play. As it's too common in Japan, the activists there are just looking for a quick flip and seem to have given up on the idea of actually changing thir targets' long-term prospects. Reason why they end up selling their stake back to the company so often. Still accretive to other shareholders provided those shares get ultimately cancelled. But let's not kid ourselves that black cover and whomever else is looking for a 3-4x here.
The rest free is wild. There's so much easy to value assets here.
If the activist just flips it, that's fine. And it is accretive. Massively!
Here's the thing: we don't ever need to unlock value fully to make a great return. I'm not greedy! Let's say company buybacks black clovers stake. At current price/tiny premium to make them happy. Then a month later insiders offer to buyout the company in an MBO for say 12,000 JPY. The assets are worth 18,000 (much more after the accretive buyback actually..) ignoring the actual business value! It's a total win win. They get the company for less than free and we get 100% return. If they want to be less egregious they can offer 150% premium.
These kinds of deals have happened. Seen 200%+ premium MBOs. It can be a win win. TSE pushing for this. Either do better on capital allocation or go private. Going private is a good way to solve the issue of cheap companies.
This is never about getting the full value. I'm happy to sell my shares for well below intrinsic value so insiders can make some money too!
Nice write-up, Altay. I am interested in the portfolio of securities. But the report you attached says "Takigami Kogyo" instead of "takigami steel". Also, you say that is a q2 24 report but I can't seem to find it anywhere (original version, I mean). Edinet has one said securities report but it says "Takagimi Kogyo" and dates back to 2017. Just wondering if you can help me clear this up. Thanks
One might wonder, however, why the company's profits are so low. After all, the assets also generate income, such as capital gains or rental income. But these are obviously low. It can be argued that the assets are not as valuable or are poorly managed. (The average net-profit over 5 years was JPY 635m, compared with a market capitalisation of JPY 13.3bn).
The following addition: If the stock portfolio is valued at fair value (market value), this would already generate income through price increases, which are recognized in the income statement. (Only cash flows are not generated). Of course, it may be that the prices of the shares held have risen only slightly. However, the Nikkei Index, for example, has performed quite well in recent years.
Unrealized capital gains don't show up as income for EPS/net income purposes. Only when they sell and they recognize the gain. The gains are unrealized currently.
Evergreen is likely a related company of Okazaki Shinkin Bank, as its address matches that of Okazaki Capital GP, a subsidiary of the bank involved in investment operations. Okazaki Shinkin Bank is one of the leading credit unions in Aichi Prefecture, commonly used by small and medium-sized enterprises. Since Takigawa Kogyo is located in Handa City, Aichi Prefecture, it is natural for them to use Okazaki Shinkin Bank. It is also a common practice in Japan for long-established companies to have their shares held by banks or credit unions that have invested in them, suggesting that the shares were likely transferred through a typical Japanese business arrangement.
Who is the ultimate beneficial owner of the shares then? The company said the share sale was enough to make the parent company no longer affiliated, but if it's the same beneficial owners, seems strange phrasing, though could technically be correct.
You only considered affiliated past a certain owernship or effective control threshold. Not the case in those typical japanese cross-shareholding arrangements.
I have no idea what their intentions are. As I mentioned in my Mansei writeup, Black Cover convinced Mansei to buy back their shares (they promptly bought out Black Cover's entire stake). It was a big buyback! Buying back 29% of outstanding shares in 1 shot at net net valuations is accretive to remaining shareholders.
I think Black Cover left a lot of $ on the table selling their stake to the company given undervaluation, but they made a quick 30% ish and intrinsic value of remaining shares are higher.
I found the below translated from their May 24' medium term mgmt plan as compared to the mgmt plan from May 21' where there was not any mention of disposing investment securities and returning profits to shareholders. Also used the term capital efficiency 5x more than the 2021 mgmt plan. May be noise but at least progress. Also thank you for a great find and write up Altay!
"2. Financial Strategy As a financial strategy, we will improve operating cash flow by expanding profits, and utilize various procurement methods with an awareness of capital efficiency, such as the sale of investment securities and bank loans, to strategically invest in human capital, equipment, M&A, etc., and return profits to shareholders"
They are talking about shareholder returns which is good (in the new mid term plan). They're saying the right words (management that is conscious of capital costs), but let's see if we see any real big returns! Would love to see a buyback and boosted dividend.
They are sitting on net cash, but they aren't egregiously piling up cash like many other Japanese companies (instead investing it in securities and RE).
I don't expect the company itself to return cash to shareholders in any meaningful way without any outside pressure. Black Clover may push for it in the next AGM. Just speculating.
Until value is realized this is just a big portfolio of securities, with heavy tilt into MUFG and Mitsubishi Corp + rental RE in Japan.
I am patient. Will sit on this as part of my basket.
Worth emphasizing here: I know nothing about Black Clover or Evergreen’s intentions. I am only speculating. I don't even know who Evergreen is. My initial thought was it was connected to the family, but the sale was listed in the company's history section in latest securities report saying "Takigami Seiki Kogyo Co., Ltd. is no longer an affiliated company due to the sale of our shares", which made me assume they aren't connected to the family.
nice! I'm usually not into Japan value but this kind of thing is next level! Only a fool does not change his mind
Wow. Great find!
Great write-up but the way I see this is more as a cheap option on Japan - via the largest bank and one of the leading trading company, plus the rest for free - than an activist play. As it's too common in Japan, the activists there are just looking for a quick flip and seem to have given up on the idea of actually changing thir targets' long-term prospects. Reason why they end up selling their stake back to the company so often. Still accretive to other shareholders provided those shares get ultimately cancelled. But let's not kid ourselves that black cover and whomever else is looking for a 3-4x here.
The rest free is wild. There's so much easy to value assets here.
If the activist just flips it, that's fine. And it is accretive. Massively!
Here's the thing: we don't ever need to unlock value fully to make a great return. I'm not greedy! Let's say company buybacks black clovers stake. At current price/tiny premium to make them happy. Then a month later insiders offer to buyout the company in an MBO for say 12,000 JPY. The assets are worth 18,000 (much more after the accretive buyback actually..) ignoring the actual business value! It's a total win win. They get the company for less than free and we get 100% return. If they want to be less egregious they can offer 150% premium.
These kinds of deals have happened. Seen 200%+ premium MBOs. It can be a win win. TSE pushing for this. Either do better on capital allocation or go private. Going private is a good way to solve the issue of cheap companies.
This is never about getting the full value. I'm happy to sell my shares for well below intrinsic value so insiders can make some money too!
I am with you, one of my current 6 positions... Thanks again for that writeup
What else do you like? Do share! I enjoy digging into new ideas.
In the value bucket: VIL.FP, VAL.US, BHU.SG
Nice write-up, Altay. I am interested in the portfolio of securities. But the report you attached says "Takigami Kogyo" instead of "takigami steel". Also, you say that is a q2 24 report but I can't seem to find it anywhere (original version, I mean). Edinet has one said securities report but it says "Takagimi Kogyo" and dates back to 2017. Just wondering if you can help me clear this up. Thanks
Nevermind, found it. Page 103-104 here: https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100TX7L.pdf?sv=2020-08-04&st=2024-12-10T18%3A08%3A15Z&se=2034-06-28T15%3A00%3A00Z&sr=b&sp=rl&sig=JD6FZ4qDe2uTtPudhBw%2FbXNQvLbBVUYS%2BiSt8P0lBYI%3D
One might wonder, however, why the company's profits are so low. After all, the assets also generate income, such as capital gains or rental income. But these are obviously low. It can be argued that the assets are not as valuable or are poorly managed. (The average net-profit over 5 years was JPY 635m, compared with a market capitalisation of JPY 13.3bn).
The securities portfolio does not generate a lot of income. MUFG is likely the highest dividend payer in it at 2.5%.
Rental real estate produces income but depreciation makes it seem much lower (ie look at net income of many US reits).
The core biz is forecast to break even in operating profit this year. So all net income is from dividends and RE income (after depreciation).
The following addition: If the stock portfolio is valued at fair value (market value), this would already generate income through price increases, which are recognized in the income statement. (Only cash flows are not generated). Of course, it may be that the prices of the shares held have risen only slightly. However, the Nikkei Index, for example, has performed quite well in recent years.
Unrealized capital gains don't show up as income for EPS/net income purposes. Only when they sell and they recognize the gain. The gains are unrealized currently.
Evergreen is likely a related company of Okazaki Shinkin Bank, as its address matches that of Okazaki Capital GP, a subsidiary of the bank involved in investment operations. Okazaki Shinkin Bank is one of the leading credit unions in Aichi Prefecture, commonly used by small and medium-sized enterprises. Since Takigawa Kogyo is located in Handa City, Aichi Prefecture, it is natural for them to use Okazaki Shinkin Bank. It is also a common practice in Japan for long-established companies to have their shares held by banks or credit unions that have invested in them, suggesting that the shares were likely transferred through a typical Japanese business arrangement.
Who is the ultimate beneficial owner of the shares then? The company said the share sale was enough to make the parent company no longer affiliated, but if it's the same beneficial owners, seems strange phrasing, though could technically be correct.
You only considered affiliated past a certain owernship or effective control threshold. Not the case in those typical japanese cross-shareholding arrangements.
any dividend / share repurchase plan and any commitment to going to 1x P/B from the mgmt?
They pay 100 yen per share dividend, good for ~1.6%. No word on buybacks/plans for 1x PB.
Any hint that the activist investor would push them to sell / return capital?
I have no idea what their intentions are. As I mentioned in my Mansei writeup, Black Cover convinced Mansei to buy back their shares (they promptly bought out Black Cover's entire stake). It was a big buyback! Buying back 29% of outstanding shares in 1 shot at net net valuations is accretive to remaining shareholders.
I think Black Cover left a lot of $ on the table selling their stake to the company given undervaluation, but they made a quick 30% ish and intrinsic value of remaining shares are higher.
I found the below translated from their May 24' medium term mgmt plan as compared to the mgmt plan from May 21' where there was not any mention of disposing investment securities and returning profits to shareholders. Also used the term capital efficiency 5x more than the 2021 mgmt plan. May be noise but at least progress. Also thank you for a great find and write up Altay!
"2. Financial Strategy As a financial strategy, we will improve operating cash flow by expanding profits, and utilize various procurement methods with an awareness of capital efficiency, such as the sale of investment securities and bank loans, to strategically invest in human capital, equipment, M&A, etc., and return profits to shareholders"
They are talking about shareholder returns which is good (in the new mid term plan). They're saying the right words (management that is conscious of capital costs), but let's see if we see any real big returns! Would love to see a buyback and boosted dividend.
They are sitting on net cash, but they aren't egregiously piling up cash like many other Japanese companies (instead investing it in securities and RE).
I don't expect the company itself to return cash to shareholders in any meaningful way without any outside pressure. Black Clover may push for it in the next AGM. Just speculating.
Until value is realized this is just a big portfolio of securities, with heavy tilt into MUFG and Mitsubishi Corp + rental RE in Japan.
I am patient. Will sit on this as part of my basket.