Advertisement

Three stocks to profit from corporate Japan’s cash piles

Japanese companies have been piling up cash, but investors have been discounting its value. Here, professional investor Joe Bauernfreund highlights three stocks that can unlock it.

Our Japan strategy takes advantage of a phenomenon unique to Japan: excess cash on balance sheets. An impressive 56% of companies in the Topix index (a broad benchmark containing around 2,000 stocks) have net cash. For the MSCI Europe and S&P 500 indices, the respective figures are just 23% and 16%. 

Advertisement - Article continues below

After years of seeing corporate Japan building up cash piles and neglecting shareholders, investors have applied a deep discount to cash, assuming that it will never be used productively. As a result we can find wonderful companies trading at remarkably low valuations. 

Our London-listed trust, AVI Japan Opportunity Trust (London: AJOT), is invested in 25 companies that trade on an average 2.6 times EV/EBIT multiple with 50% of their market caps covered by net cash. 

However, being undervalued is not enough to drive share-price performance. We actively engage with the management of these companies to help unlock the trapped value. 

An elevator manufacturer on the rise

Fujitec (Tokyo: 6406) is a global lift manufacturer with sales in Japan, China, Southeast Asia, North America and Europe. 

Advertisement
Advertisement - Article continues below

The most appealing aspect of the business is the maintenance contracts for the lifts. These last for decades, producing steady, recurring profit, which explains why Fujitec’s global peers trade on EV/EBIT multiples approaching 18. 

Advertisement - Article continues below

However, Fujitec, which operates the same business model, trades on a multiple of just eight. In May we launched a public campaign and released a 73-page presentation on assetvalueinvestors.com/fujitec/. We outlined several issues and put forward recommendations on how to improve Fujitec’s margins and, ultimately, the share price. 

Moving into the 21st century

Contrary to popular belief, Japan lags other developed countries in the sophistication of its information technology infrastructure. For example, cloud-based accounting and human resources management software are used by only 14% and 19% of companies in Japan, compared with 35% and 55% in the UK. 

The situation is so dire that the government warned that if Japanese companies cannot embrace new digital technology the whole Japanese economy could suffer a ¥12trn annual economic loss by 2025, equivalent to 2% of GDP. 

DTS (Tokyo: 9682) is a beneficiary of this trend, assisting Japanese companies in finding optimum IT solutions. Net cash covers 40% of the market capitalisation, and over the past five years profits have grown by 66%.

Hidden real estate

King Co. (Tokyo: 8118), a women’s apparel and accessories manufacturer, isn’t known for its real-estate business, but 57% of profits derive from rental income. 

We conservatively estimate that its real estate is worth ¥10bn, which, coupled with a ¥9bn cash pile, dwarfs its ¥10bn market value. It has been consistently buying back its shares, which, considering the severe undervaluation, is no bad thing. With cash covering 90% of the market value, we’re well protected against any sudden setbacks while we wait for the value to be unlocked. 

Advertisement
Advertisement

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020