One of the only things I remember from Peter Lynch is very readable book, One Up On Wall Street, was that you need to get interested in things which are ugly, dirty, and smelly. In fact, this is essentially the reason why, when I started looking at Japanese stocks a good few years ago, Nittoh jumped out at me right away.
Now, I know it is pretty futile writing detailed posts about Japanese stocks, since you could have made a good year’s worth of performance in a week just by buying some beta trash. So, I’m going to try and keep this short, and let you get quickly back to gawping at how rich you are getting.
In Japan, termites (literally called “white ants”) are apparently a common problem. While I have never encountered them in person, largely due to not living in a wooden barn in a village, all accounts indicate that they are not pleasant at all.
You can see some examples here: https://www.google.co.jp/search?q=%E7%99%BD%E3%82%A2%E3%83%AA&oe=utf-8&aq=t&rls=org.mozilla:ja:official&hl=ja&client=firefox-a&um=1&ie=UTF-8&tbm=isch&source=og&sa=N&tab=wi&ei=9eTvUKKzF8SkkQW9j4GwAQ&biw=797&bih=345&sei=-OTvUJqvKMfzlAWAj4CoAw
Nittoh originally was a great business, as it was an insect extermination contractor, so it used to get lots of repeat custom. However, the reason why it became cheap was that the progress in housing technology and efforts in preventing termite attacks gradually reduced the demand for termite protection. Although this demand has been falling, the additional demand from new housing construction has kept overall demand for that line of work about stable. In most of Japan, buildings have a maximum lifetime of around 50 years due to earthquakes, and when buildings get rebuilt they need anti-bug services.
Meanwhile, the company grew in maintenance contracting through M&A, and started growing other parallel businesses (building construction work) organically. At present, only 151/ 415 of their operating income is from dealing with termites.
The thesis is simple: About 5 times forward earnings for a capital-light company with some revenue visibility that has been growing NAV per share and earnings despite tough conditions. But, on an EV/ Cashflow basis (my preferred way of doing things) it is almost free (depending on how conservative you are with kicking things out of the balance sheet).
Nittoh revenues etc.
They have three segments:
Building:
Does gas facility and solar system installation work, upgrading boilers to more efficient ones, and similar. Has a backlog of over one year.
Housing services:
Termite protection.
Building maintenance:
Upgrades buildings, refurbishes them, sells old houses, does weatherproofing work, converts houses to be suitable for old people etc.
Op. inc. (thousands of yen) by segment:
Nittoh operating income by segment
Balance sheet (M Yen, MRQ):
Current assets: 2196
Of which:
-Cash: 1032.3
-AR: 715
Investments: 235.3
Buildings (depreciated) and land: 275 + 564
Total liabilities: 1308
Market cap: 966
Needless to say, if you look at the enterprise value, it is way below five times Cashflow – almost nothing, actually.
Other miscellaneous things I like about them (no particular order):
-They have been around for 40 years
-Their profits and NAV have been growing, albeit slowly, despite a very tough environment
-They are getting out of some unprofitable contracts in maintenance
-They have a very strong position in their home market of Aichi, because they get recommended by the business association there (this business association is also the top customer, accounting for about 20% of their revenues)
-They have a growth strategy
-They pay 15 Yen per share in dividends – might not be a great yield by now, but not awful
So, you should rush out to buy … but I’m talking my book. Maybe you should ignore this/ do the opposite of what I’m saying.
What I do not like about them:
-Illiquid
-The stock has been rocketing recently (duh)
-People can put off building upgrades during business downturns
-Their expansion strategy is untested, because it relies on getting market share in new geographical areas within Japan
These things which I don’t like about them are bearable.
Oh, did I mention? They’re almost free?
{ 1 comment… read it below or add one }
A couple of stocks, I like: Moresco Oil research 5018.T, produces chemical consumable, like vacuum oil, hotmelts, lubricants. This is a good business generally (Berkshire purchased Lubrizol along the same lines). The company is reasonably prices at ~9x earnings and growth organically and by acquisition (as far as I can tell)
I am also looking at Central japan Railways, which runs the main Shinkansen lines. Seems to be a growth stock of some sorts, which is surprising to me. Don’t own it but consider buying some.
I do think the REIT space should be interesting. you mentioned Hankyu REIT 8977.T before, which owns prime RE apparently. I have only taken a customary look however.