Net Net Hunter Analysis: Leader Electronics Corp

Transcription

1 Net Net Hunter Analysis: Leader Electronics Corp by Dimitrios Koutsoubos May 16th, Summary Note : Values Are Presented In Yen ( ). Fiscal Year (FY) Ends March 31st, Name: Leader Electronics Corp. Country: Japan Symbol: 6867 Minimum Trading Unit: 1000 Market Cap: 990 Million, the equivalent of $8.7 Million (USD) Analysis Type: Ansan Net Net Shares Outstanding: 3.54 Million Share Price: 280 Net Current Asset Value (NCAV)/Share: 634 Current Discount: 55.8% Net Cash per Share: 348 Price/Net Cash: 80% Dividend Yield: 1.75% Debt to Equity: 0% Current Ratio: 10.94x Burn Rate QoQ: +3.37% (positive, NCAV per Share increased) Burn Rate YoY: +5.77% (positive, NCAV per Share increased) Special Caution This is a Japanese company and, as such, provides investors with little to no information in English. The analysis has been conducted using the company s consolidated financial statements provided by Thomson Reuters, The Financial Times, the EDINET (Electronic Disclosure for Investor s NETwork), and a small number of press releases. Investors should be cautious investing in these types of companies and recognize that material information may be missing. If you choose to purchase these sorts of stocks, make sure you fit them into

2 a diversified portfolio that aims to leverage the mechanical/structural characteristics of net net stocks as a whole. The company website, with very little English information, can be found here. Business Leader Electronics Corp. (6867:TYO) is primarily engaged in developing and manufacturing electrical measuring instruments. The Video-related Equipment category includes video signal-related products for commercial and consumer video equipment, high definition television (HDTV) equipment, and others: such as video signal generators, HDTV signal generators, waveform monitors, vector scopes, display signal generator, ground modulators, and receivers for digital broadcasting. The Radio Wave-related Equipment category includes high-frequency signal generators, television field-strength meters, and characteristic testers for electronic components; such as standard signal generators, television field-strength meters, automatic inspection devices for television tuners. The Others category provides basic measuring instruments, repair services, parts, and others. Segmentation of Sales (Data Source: FY 2017 firm s report, Graph: Made In-House) The stock trades on the Tokyo Stock Exchange. In FY 2017, Total Revenue stood at 2.33 Billion. Leader Electronics corporate headquarters are located at , Tsunashima-Higashi, Kohoku-ku, Yokohama-Shi , in Japan.

3 Ansan Criteria Net Net Hunter Ansan Scorecard The company must pass all the criteria to be purchased. Failing means passing on the stock. Average Daily Volume $1000USD Equiv. - Pass In the Ansan strategy, we seek net nets with a minimum volume that ensures an investor can buy or sell the stock. According to FT.com, the average daily volume of Leader Electronics stock is 3,130. At a stock price of 280, the dollar volume is about $7,700. This is much larger than the criterion s $1,000 limit, so the company passes. 2 Cent USD Equiv. Minimum Stock Price - Pass While we want firms that are out of reach of professional fund managers. We want to make sure that each firm s stock price is above 2 cents to reduce the risk of fraud and to ensure a basic level of managerial quality. Leader Electronics stock trades at 280, the equivalent of $2.47 USD. Luckily, the company satisfies this criterion. Low Price to NCAV - Pass The stock trades at 280, while NCAV came in at 634 per share for FY 2017, ended March 31, This means that the stock trades at just 44.2% of NCAV, or a 55.8% discount to NCAV. This is enough to pass this crucial criterion. The size of the discount provides both a strong margin of safety and large upside prospects. Low Debt to Equity - Pass Firms trading below NCAV are troubled companies facing major business problems. In these situations, it s important that the company does not have the burden of debt since debt could easily cause the company to slip into bankruptcy. An absence of debt also increases the likelihood of a takeover and frees up operating and investment flexibility. Management is more able to take the steps needed to turn the business around and buy back stock. According to the company s FY 2017 results, their Total Debt was zero and their Equity was 2.92 Billion. About 507 Million of debt related to Retirement Benefits is included on the Balance Sheet but we have not counted it towards the company s debt count because it s non-interest bearing debt. Consequently, the Debt to Equity ratio comes in at 0%. That zero-debt level means a broader margin of safety for the company and, hence, a strong pass. Burn Rate Low or Positive - Pass NCAV has increased 5.77% quarter over quarter (QoQ) and 3.37% year over year (YoY). A high Burn Rate would eliminate NCAV over time, destroying any upside potential and making the stock a value trap. The positive figures here undoubtedly grant a pass.

4 Not Selling Shares - Pass During FY 2017 and FY 2016 the share count has been almost stable at around 3.54 Million. In FY 2015 the company made a large share repurchase amounting to 623,849 shares for about 170 Million. The firm is not selling shares, and by taking into account the older repurchase, it gives the firm a strong pass. Not Majority Chinese - Pass Not all Chinese firms are fraudulent. However, auditors have been lax, and investors have lost hundreds of millions due to the country s tendency to produce fraudulent firms and then sell those firms to unsuspecting western investors. That is why we avoid Chinese companies. According to our sources, no Chinese production operations are taking place; rather, the company only sell products in China. In FY 2017, Revenue of the firm s Asian Segment, representing China and other Asian countries, came in at 370 Million or only about 16% of Total Revenue. Consequently, most of Leader Electronics business is not in China and the firm gets a pass on this criterion. Existing Operations or Liquidation - Pass While the company s Net Margin is low or negative, we do not consider these reasons to avoid investment. More important is the firm s current operational status, and Leader Electronics definitely has an operating business. Revenue still hit 2.33 Billion in the last Fiscal Year. It is important to avoid firms that are not operating as businesses and also not liquidating. Net nets are deep value stocks and, like most value stocks, we want management to overcome whatever business problem is now plaguing the company to restore profitability. It s tough to turn operations around that don t actually exist. In cases like these, a liquidation would be an adequate solution since investors could expect a redistribution of capital through asset sales.

5 Leader Electronics has significant operations, so it passes this criterion. Not a Financial, Regulated, ADR, Real Estate, Resource Firm, or Closed Fund Pass Some types of firms make for better net net stock investments than others do. The categories listed above have either been avoided by academic net net stock studies or, as in the case of Resource Exploration companies, have been shown to produce terrible returns. Leader Electronics is a manufacturer of Electronic & Electrical Equipment, thus not fitting any of the above categories. It s a clear pass. Large Current Ratio - Pass At the end of FY 2017, Current Assets were about Billion, while Current Liabilities were 277 Million, for a Current Ratio of 10.94x. This more than meets our criterion s 1.5x threshold. It s a very strong pass. Among The Lowest 20 Price to NCAV Stocks - Pass This is a basic criterion for the Ansan Strategy. The strategy takes advantage of the Net Net Hunter Shortlist which screens and presents the best NCAV stock opportunities around the globe. Leader Electronics is among the cheapest 20 on the Shortlist, with a Price to NCAV of 44.2%. One more pass. Market Cap Less Than $50 Million USD - Pass Leader Electronics Market Cap comes in at 990 Million or the equivalent of about $8.7 Million US dollars. This is smaller than our $50 Million US dollar equivalent cut-off. Backtesting has shown that smaller firms trading as net nets perform much better than larger firms. The stock achieves a solid pass. Leader Electronics meets all of our Ansan Criteria, passing inspection. The company is cheap, has a low P/NCAV, no Debt, and a positive Burn Rate. Business Problem or Reason for Undervaluation For FY 2017 ending in March 31, 2017, Revenue declined 9.1% to 2.33 Billion. Net Margin has been either low or negative in the previous few years. The main reason is the stagnation of demand for broadcasting related equipment. This calls into question the viability of the business and threatens Leader Electronics future. The large share repurchase in FY 2015, about 15% of Shares Outstanding, magnified the degree of undervaluation. When a stock trades at a discount during a massive buyback, the percentage of intrinsic value spent for the repurchase is smaller than the percentage of Market Capitalization wiped out. Thus, an already cheap stock becomes cheaper. Mathematically, the repurchase can be considered an additional reason for the undervaluation.

6 Furthermore, many sites that aggregate financial statements (eg. Yahoo Finance or FT.com) erroneously present Market Capitalization and Shares Outstanding as they do not subtract Treasury Shares from Issued Shares. In most cases, Issued Shares and Shares Outstanding are identical. For Leader Electronics, the Market Capitalization is 990 Million, but FT.com states the Market Capitalization as 1.18 Billion. Based on this data, valuation seems less attractive than it really is, and many investors may ignore the real value of the stock. Attempts to Address the Problem Leader Electronics is counting on the renewal of broadcasting equipment sales as digital TV broadcasting grows. So, the company plans to strengthen its global sales structure both abroad and domestically. In order to respond in the rapid development in digitalization and ultra-high definition imaging, Leader plans to maintain R&D investment. As far as production goes, design strengthening, and outsourcing for better efficiency may reduce delivery time and costs. Finally, the company admits to being very cautious regarding capital investment. This indicates a defensive approach which better serves our net net investing strategy. In the very recent FY 2017 results, management refers to Project 65 as a special development plan for accelerating profit, sales, and the development of new products. According our research, no more information is available about this project. Other Factors Leader Electronics has a significant Cash and Deposits position of 2.02 Billion. This amount is about 2x the company s Market Capitalization. Net Cash of 1.23 Billion is also higher than Market Capitalization. Both metrics show the impressive undervaluation of this stock. Most net nets are loss making, a reason for their deep undervaluation. So, we do not require our companies to be profitable. However, it s great when a company is profitable. In FY 2017 Leader Electronics earned 69 Million in Net Income. This factor, like positive NCAV growth, preserves the stock s value and may lead to a turnaround that would send the stock skyrocketing. This could lead to a valuation based on earnings, far beyond NCAV. Lastly, the company paid (what looks like) it s first and only dividend over the last 4 years on March 29th, The 5 Yen dividend amounts to a yield of 1.75% based on the current share price.

7 Valuation Shares currently trade at 280 while NCAV per share comes in at 634, for a discount to NCAV of 55.8%. Current Assets: Billion Less Total Liabilities: 789 Million Equals Net Current Asset Value (NCAV): 2.24 Billion NCAV: 2.24 Billion Divided By Shares Outstanding: 3.54 Million Equals NCAV Per Share: 634 NCAV Per Share: 634 Less Price: 280 Difference: 354 Difference: 354 Divided By NCAV Per Share: 634 Equals Discount to Intrinsic Value: 55.8% Difference: 354 Divided By Share Price: 280 Equals Upside Potential: 126% The company is currently trading at a large 55.8% discount to NCAV, which means that the stock would have to rise 126% before it reached NCAV. The stock is very cheaply valued.

8 Leader Electronics Stock Price Potential (Source: Made In-House) Conclusion Leader Electronics is a Japanese company under stagnant growth and, like other net net stocks presented here, is trading at a large discount (55.8%) to NCAV. In addition, it is totally free of debt, and its Market Capitalization is very small at 990 Million, or $8.7 Million in US dollars. Both the YoY and QoQ NCAV per-share change is positive, preserving its value and profit potential. A very positive fact is that the company was profitable in FY The Current Ratio is also large at 10.94x and the large repurchase that took place in FY 2015 is another sign of strength. The company bought back approximately 15% of Shares Outstanding. In brief, I believe that Leader Electronics is an appropriate pick for Ansan investors and offers a big upside of 126% with strong defensive characteristics. Make sure you fit it into a diversified portfolio of other Ansan stocks. Disclaimer All stock investments are risky and could lead to losses. The stocks we recommend here are no different. They are intended to be purchased and held in a well-diversified portfolio composed of similar Net Net stocks. Any one of these companies could lead to loss and we intend for investors to focus on the performance of their portfolio as a whole over a minimum of 5 years rather than any single stock. Dimitrios Koutsoubos did not own shares in Leader Electronics Corp at the time of publication.