Description

Hibiya Engineering is a simple Japanese net/net whose current assets plus investments less all liabilities exceeds its market cap by almost 70 percent. It is debt free and has a profitable operating business that is throwing off enough cash for a 3.3 percent dividend yield.  Management has been slowly buying back stock for the last several years including around 2 percent of shares outstanding in each of the last two fiscal years. The company is beginning the process to slowly sell down their investment portfolio which could provide a significant catalyst for value recognition should they take those proceeds and buy back stock more aggressively.

Hibiya is an engineering and facility construction company that designs and installs air conditioning, plumbing and sanitation and electrical equipment.  Air conditioning is a quarter of sales, plumbing is 12 percent and electrical is 14 percent. They have pretty significant customer concentration as NTT is over 30 percent of sales.  Nobody is going to confuse this with a great company, but I also don’t think it is a bad company. A portion of their revenue is recurring from maintenance contracts and sales have been remarkably stable over the last decade.  Each year over the last decade, they have also been net income and cash flow positive.  They have virtually no capex needs spending under 200 million Yen ($2.5mm USD) in each of the last two years on PPE.

Management seems prudent and shareholder friendly . Buybacks and rising dividends of this nature are not exactly common in Japan and the CEO’s letters to shareholders are even-handed and suggest a strong focus on driving shareholder value. Although the stock trades for the same price it did back in 1992, it is up about 20 percent since the current CEO, Haruki Nomura took over in June 2010

FY’12, which ended in March of this year, was by far their worst year since at least going back to 2000. Earnings were down 45 percent and cash flow from operations was down 98 percent to nearly zero.  The Tohuku earthquake occurred on March 11, 2011 so most of the immediate financial impact was borne in the first few quarters of FY’12 as electricity shortages, supply chain disruptions and order delays were impactful. By the end of the third quarter, Hibiya was announcing a resumption in projects that were suspended after the earthquake and  towards the latter half of last fiscal year, sales began rebounding and the order backlog increased 15.5 percent year over year suggesting the company will revert to more normalized earnings. Management forecasts a 21 percent improvement in net income over 2012 (but still 33 percent below 2010 levels).  Going forward, Hibiya will start comping against weak post-earthquake quarters.

Below is a very simple NAV calculation. It is pretty straightforward until you get to investment securities which I break down below based on available footnotes.

As of March 31, 2012 (millions of Yen)
Current Assets = 42,434
Investment Securities = 27,521
(Less )Total Liabilities = 23,073
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NAV = 46,882
Market Cap = 31,780,396 shares x 873 Yen = 27,744 million Yen

Hibiya’s quarterly updates do not include a breakdown of investment securities although aggregate value is known (above). Based on the March 31, 2011 annual report, the breakdown of investment securities is as follows:

Equity securities: 5,468 million Yen
Corporate Bonds: 1,003 million Yen
Government Bonds: 2,815 million Yen
Other Bonds: 280 million Yen
Available for sale securities with no available fair values:  1,524 million Yen
Investment in Affiliates: 14,512 million Yen

Most of the above is fairly stable and straightforward with one big exception, the investments in affiliates, which represent 60 percent of the long term investment securities on the balance sheet as of March 31, 2011.

The affiliate is Nihon Meccs Co, LTD a privately held facility management company. Nihon Meccs earned 1,653 million Yen in 2011 and had net assets of 31,686 million Yen. Nihon Meccs was originally Hibiya Maintenance company, but was taken over in 1972. Hibiya accounts for it under the equity method.  

Even if you want to haircut the value of Nihon Meccs, there is still quite a bit of margin of safety based on just the assets on the balance sheet and the operating business is stable and throwing off cash (in normal years). The buybacks and dividends should continue with an outside chance of a major acceleration which suggests a low risk, moderate upside bet.

Catalyst