Tokatsu Holdings Co (2754.T): an unnoticed Honda trader

Tokatsu Holdings Co trades new four-wheel Honda cars from its 9 dealer shops and used cars from another 3 shops, all in Japan. The company also provides maintenance services for cars. The company buys used cars from trade-ins and auctions. Furthermore the company sells car insurance including compulsory liability insurance and provide car loans. In the “Others” business segment the company sells life and non-life insurance in 3 stores and runs a sheet metal painting factory.

Photo by Obi - @pixel7propix on Unsplash...

The stock trades under code 2754 in Japan. Currently the stock price is 385 JPY. This is a very small company with 12.8 million USD market cap. The company is extremely cheap:

EV/EBIT=1.1

P/E=7.1

EV/Revenue = 0.061

P/FCF = 6.8

P/Tangible book = 0.37

Dividend yield = 3.9%

In addition the compoany has generated good cash flows during the last 8 years. Compared to many other Japanese stocks this stock had better metrics (higher and less variable) for return on equity and return on assets.

This is not a net-net because NCAV/Market cap is 0.87. However the stock trades at a large discount to liquidation value when taking land holdings into account. My estimate for the liquidation value is about 3.5 billion JPY while the market cap is currently only 1.9 billion JPY.

What I also find attractive is that trading in this stock is pretty illiquid and that the stock price seems to be much less volatile than prices of other stocks.

Last financial year the cars segment was good for 98.7% of total sales. Within the cars segment about 60% of the revenue is from new car sales and about 15% is from used car sales. The remaining revenue is mainly from car maintenance.

Key audit matters: Recoverability of deferred tax assets. There are only 61.4 million JPY of deferred tax assets so this is not significant.

While Japanese companies always report quarterly most of them report cash flows only twice a year. This company reports cash flows quarterly.

There are 4.84 million shares and also about 55k of very long dated employee options (among others page 45 annual report). Exercise prices range from about 100 JPY to prices comparable to the current stock price.

The balance sheet is strong with low leverage, a high current ratio and much more cash than debt. The combination of a large cash balance with substantial current debt is a red flag. The debt is secured by about 800 million JPY of trade receivables and about 1 billion JPY land (page 42 annual report).

Substantial shareholders (page 22 annual report): executive chairman Kuniharu Saito 24.03% (born in 1941), Tokatsu Holdings Employee Shareholding Association 6.48%, three Japanese insurers own 4.65% each, 6 Japanese individuals each own stakes between 3.35% and 3.65%. Three individuals have surname Inada.

I think in practice the main shareholder can block an unfriendly bid. Apart from the executive chairman there are 3 other managers with substantial wealth in shares: one director owns about 300k USD in shares and the 2 other directors each own about 100k USD in shares. They are not in the list with the 10 largest shareholders.

The company does not own any shareholdings in other public Japanese companies.

While Honda Motors is an important business partner it is not a shareholder of the company. I searched on the name of the chairman and main shareholder and keyword “Honda”. This search did not reveal an ownership connection between the 2 companies.

The company pays a dividend once a year. It has just increased the dividend to 15 JPY per share. I think there is plenty of room for more dividend hikes. I have not found any significant dilutions or repurchases.

Related party transactions: This section in the annual report says “Not applicable”, on page 60 of the annual report. Director compensation is modest: on average less than 10k USD per director. Two directors also get on average about 20k USD each for being director at a subsidiary. Directors might also get salaries as employees.

My take: This stock is extremely cheap based on various metrics related to earnings and also cheap compared to liquidation value. It is a no-growth stock. I like that because it means few other investors interested in it, which explains the low price.

I have not found any governance issues. Though the company does not pay a high dividend I find this company shareholder friendly. I also like the low volatility of the stock price. I like the ownership structure as well with many different individuals holding substantial wealth in the stock.

I think this is a good stock for a small position. Disclosure: I own shares of Tokatsu Holdings Co.