7014.JP - Namura Shipbuilding Co

[west]

A company that builds ships (surprise!) that's been around for over a hundred years.  Last year they listed on the Tokyo stock exchange under the first section, which is why I think (I don't know) their price has jumped so much in recent history.  I think this more big-market listing may serve as a catalyst in the future as well.

 

Here are the numbers:  Significantly negative EV (so EV/EBIT and EV/EBITDA numbers are not meaningful).  ROIC > 24%+ the last three years.  P/TBV of 0.76x with BVPS having grown 22% last year.  More than ~12%+ each year for the last three years.  Current P/E of < 4.0x.

 

Slapping an industry multiple of 21.01x EBIT (from Damodaran's industry datasets) on this company with excess cash not added back to EV gives us an EV of 453,711Y.  Compare to the current market cap, not their negative EV, of 49,462Y.  So a pretty significant upside.

 

The industry multiple of 13.04x EBITDA would result in an EV of 322,231Y.  Again, assuming all excess cash not needed to run the business (1% of sales) doesn't exist in the calculation.

 

Unlike my other Japan posts, this stock is very liquid.

 

Caveats: A current liability of 43,947Y on their balance sheet that I don't know what it is.  This is more than covered by their cash balance, but if someone wants to figure it out and post about it here, please do so!

 

Also, their FCF swings around a good amount.  Adjusting for standard asset/sales ratios (read: figuring out standard MCX versus growth capex) doesn't help the swings either.

[peter1234]

A company that builds ships (surprise!) that's been around for over a hundred years.  Last year they listed on the Tokyo stock exchange under the first section, which is why I think (I don't know) their price has jumped so much in recent history.  I think this more big-market listing may serve as a catalyst in the future as well.

 

Here are the numbers:  Significantly negative EV (so EV/EBIT and EV/EBITDA numbers are not meaningful).  ROIC > 24%+ the last three years.  P/TBV of 0.76x with BVPS having grown 22% last year.  More than ~12%+ each year for the last three years.  Current P/E of < 4.0x.

 

Slapping an industry multiple of 21.01x EBIT (from Damodaran's industry datasets) on this company with excess cash not added back to EV gives us an EV of 453,711Y.  Compare to the current market cap, not their negative EV, of 49,462Y.  So a pretty significant upside.

 

The industry multiple of 13.04x EBITDA would result in an EV of 322,231Y.  Again, assuming all excess cash not needed to run the business (1% of sales) doesn't exist in the calculation.

 

Unlike my other Japan posts, this stock is very liquid.

 

Caveats: A current liability of 43,947Y on their balance sheet that I don't know what it is.  This is more than covered by their cash balance, but if someone wants to figure it out and post about it here, please do so!

 

Also, their FCF swings around a good amount.  Adjusting for standard asset/sales ratios (read: figuring out standard MCX versus growth capex) doesn't help the swings either.

 

Thanks for the interesting idea.

 

The industry multiples of 21x Ebit and 13x Ebitda seem really high. But then I might be just too cheap.

;)

 

[west]

If you're too cheap, forget the industry multiple.  It's also trading at a discount to its liquidation value.

[peter1234]

If you're too cheap, forget the industry multiple.  It's also trading at a discount to its liquidation value.

 

Thanks for pointing this out. Cheaper than liquidation value is certainly cheap.

;D

[rykelsap]

West,

 

What are your thoughts regarding the variance between free cash flow and net income over the last five years? I understand that the business model is inherently subject to large swings in cash flow but would have expected net income and cash flow to converge over a five year period. I see cumulative free cash flow of (¥26,905mm) since FY2010 versus ¥34,889mm of cumulative net income. On the other hand, I see cumulative free cash flow of ¥66,522mm since FY2005 versus ¥46,371mm of cumulative net income so maybe I am worried about a non-issue.

[Packer16]

From what I can tell shipbuilders are priced on P/BV basis as shipbuilding is a cyclical business.  The 4 largest Korean shipbuilders have P/BV ranging from 0.61 to 1.13x.  The EV/EBITDA ratio may be high due to shipbuilding surplus driving profitability down.  Two Japanese comps you may want to take look at are Mitsui and Mitsubishi. 

 

Packer

[west]

From what I can tell shipbuilders are priced on P/BV basis as shipbuilding is a cyclical business.  The 4 largest Korean shipbuilders have P/BV ranging from 0.61 to 1.13x.  The EV/EBITDA ratio may be high due to shipbuilding surplus driving profitability down.  Two Japanese comps you may want to take look at are Mitsui and Mitsubishi. 

 

Thanks for the heads up.  It never even occurred to me that some firms might be priced in different ways from others.  I guess you just have to learn everything you know at some point!

 

Kind of off topic, but I've got a question for you if you don't mind.  I've recently been going through Damodaran's material.  He regularly emphasizes the difference between "valuing" a company and "pricing" a company.  For all the Japan stocks I've posted, including this one, if you value them through a DCF or just by normalizing their earnings and dividing that number by a relatively high discount rate, they're all really undervalued.  In fact, many have a negative EV like this firm.  However, some of them perhaps aren't under-priced based on industry comps.

 

Now he says that firms that are undervalued will eventually become properly valued.  (Meanwhile, the benefit of under-priced firms is their price tends to revert to what it should be quicker.)

 

Anyways, to get to the questions, wouldn't this require a shift in how the market prices companies eventually, or in what multiples the market uses for the firm?  Does that actually happen in reality (my experience in the markets is short) or are firm's like Namura Shipbuilding more than likely bound to be under-priced forever, or at least until some external action like them being acquired happens?

 

Thanks.

[west]

West,

 

What are your thoughts regarding the variance between free cash flow and net income over the last five years? I understand that the business model is inherently subject to large swings in cash flow but would have expected net income and cash flow to converge over a five year period. I see cumulative free cash flow of (¥26,905mm) since FY2010 versus ¥34,889mm of cumulative net income. On the other hand, I see cumulative free cash flow of ¥66,522mm since FY2005 versus ¥46,371mm of cumulative net income so maybe I am worried about a non-issue.

 

rykelsap, I honestly have no insight.  The variability of Namura's cash flows is the scariest factor about them to me.  I can't think of another company in my list off the top of my head where the cash flows swing around 1/4 as much as with Namura.  I don't know if it's due to the nature of the shipbuilding business or what.

 

Again, it's too bad I can't really understand Japanese.

 

Final comment - Namura is not one of my larger holdings by any stretch.  <2% of my total portfolio.  And Packer's comment above makes me wonder if I can't find a better company to replace it based on a comp perspective.

 

But then again, companies that are super cheap often have hairs...

[topofeaturellc]

I don't really think asset based measures are of much use for shipbuilding.  They're almost like massive steel service centers attached to an incredibly complex assembly business and a big savings account.  There isn't much fixed capital required and actually the more they  outsource block construction the less capital in general they need.

 

Especially in the case of Japan (and these guys appear to make bulkers and oil tankers - the more commoditized end of the market) I've always thought if you could buy them at a nice discount to the forecasted cashflows from their current order book you are probably ok.  The problem is that Japan is really at the wrong end of the cost curve in ship building these days, and they really only survive because the local shipping companies feel compelled to buy from them.  But I don't think there is much non-Japanese business. At least there wasn't back in '06 when I was looking at things like this.  But maybe if its a cheap multiple of LT  FCF it might be interesting?  Like 10 years or more? IDK.  I've spent a lot of time looking at these, but never bought one.

 

BTW  but when you calc EV make sure you are backing the prepaids out of cash. I'd guess that 43.8 Yen current liability is that.  That can't go to support the cap structure in a liquidation. -

 

I actually just looked at the B/S -  So I've got Net Debt of -23.4 Bil JPY including the prepaids as debt  - so your EV is more like +20.62 Bil JPY and over the last five years they've generated 10 bil on average in FCF before Working Cap. Unfortunately working cap is massively negative and more than swamps the FCF because they've been delivering ships so prepaids have been declining. BTW - Pre-Tax Income is about that same # (which is essentially EBIT - so that makes sense). I don't know how to figure out what full cycle FCF looks like because I appear to only have five years of mostly delivering ships. I think you need to go back at least to 2000 to see what it looks like when the order book is building.  Could be interesting.

 

The huge variance between CFO and NI is just part and parcel of the long-lead time, percentage of completion business.

[west]

Good catch with the EV calculation.  Especially since I treated those unknown "current" liabilities as debt when I did my ROIC calculation (meaning: I didn't include them as part of invested capital).

 

I'm getting:

 

~76,300m excess cash = 77,543m Yen cash - ~1,250m Yen cash needed for operations (1% of sales)

~13,200m Yen Total Debt

~44,000m Yen for that unknown liability

~47,000m Yen for Today's market cap

 

So the (error corrected) EV would be: 47,000m + 44,000m + 13,200m - 76,300m = ~27.9b Yen for today's EV, not negative or the ~20.7b you found.

 

Did I miss something (again)?

[topofeaturellc]

Well, I'm very bad at basic math, so I could have just added up the numbers wrong, but also I think I was using the B/S from the March Q, where I think advance payments were a lower number than YE.

[west]

I re-checked your and my calculation.  I think both you and I are on the same page as far as "net debt" goes, or ~ -19b to -20b (I use "net excess cash" myself, but I suppose the only difference is the sign.)  So the only place where we could be off is the market cap.  I'm seeing ~47b Yen for the current market cap on MSN Money and Financial Times.  Are you seeing something else?

[topofeaturellc]

I probably just added something wrong.  The only change to your calculation I made is the deposits.

 

Here is the data I used from the March BS

Cash - 77.5

ST Debt 6.65

Misc Current Liabs  37.8

LT Debt  6.53

Market Cap 47

 

20.48

[matjone]

37% decline in equity.  Tried to figure out what happened is pretty tough reading these translated pages... I think it maybe had something to do with a transaction to acquire Sasebo

 

"Net assets in the third quarter of the current fiscal year end is, and consolidated subsidiary Sasebojukogyo Co., Ltd. mainly by stock exchange fiscal year-end 39,383 one million yen year before by and retained earnings that capital surplus was increased by the increased Is pressurized, it became 106,347 one million yen"

 

http://www.reuters.com/finance/stocks/7014.T/key-developments/article/2996586

[writser]

recent VIC article on Namura:

 

http://www.valueinvestorsclub.com/idea/Namura_Shipbuilding/136217