At an 80% discount to its estimated pre-tax fair value, New Tachikawa Aircraft may be an interesting speculation. New Tachikawa and its affiliate, Tachihi Enterprise are companies which each own real estate in the Tachikawa City area of Tokyo adjacent to what, following World War II, was a US army base. The companies recovered ownership of their properties in the 1970s and today these are principally employed as leased warehouse and logistic facilities. New Tachikawa’s land inventory amounts to 144,000 square meters, while Tachihi’s is 760,000 m2. Each company enjoys a very strong financial position, as evidenced below:
(Yen in billions, except per share)
New
Tachihi
Tachikawa
Shares outstanding (mm)
14.0
11.0
Price per share
¥5,920
¥2,820
Market value
82.9
31.1
Less:
Cash and marketable securities - net
14.0
6.6
Long term investments and receivables (a)
17.2
6.4
Enterprise value
¥51.6
¥18.1
Note:
(a)
Described, at least in the case of Tachihi, as consisting principally of JGBs.
The companies have cross-holdings, with New Tachikawa owning 6.0 million shares (42.6%) of Tachihi, and Tachihi owning 2.7 million shares (24.2%) of New Tachikawa. These positions are carried at essentially nothing.
Having been acquired in the early part of the twentieth century, the companies’ real estate holdings are on their balance sheets at a derisory value. Macquarie Securities has estimated, based on Japanese government land price surveys, that, as land alone, New Tachikawa’s and Tachihi’s holdings are worth ¥42.8 billion and ¥171.6 billion respectively.
It is a simple matter to adjust the companies’ balance sheets to reflect these assumed values, and, having done this, to give each company credit for its share of the other’s (i) operating assets; and (ii) stake in itself. This latter adjustment is accomplished by treating, for instance, New Tachikawa’s portion of Tachihi’s stake in New Tachikawa as treasury stock. This exercise is show below:
Tachihi Enterprise (8821)
(Yen in billions)
Stated
As
As further
3/30/2007
adjusted
adjusted
Cash and marketable securities
¥14.0
¥14.0
¥14.0
Other current assets
0.2
0.2
0.2
Total current assets
14.2
14.2
14.2
Long term investments and receivables
17.2
17.2
31.4
(b)
Net fixed assets
8.3
179.4
(a)
179.4
Other assets
1.9
1.9
1.9
Total assets
41.7
212.7
226.9
Total liabilities
5.9
5.9
5.9
Shareholders equity
35.8
206.9
221.0
Total liabilities and equity
¥41.7
¥212.7
¥5.9
Number of shares outstanding
14.0
mm
14.0
12.6
(c)
Indicated pre-tax value per share
¥17,599
Notes:
(a)
Mark land up to estimated pre-tax fair value.
(b)
Reflect Tachihi's 24.2% share of New Tachikawa's "as adjusted" value. Carrying value is assumed to be nominal.
(c)
Reduce shares outstanding to reflect Tachihi's 24.2 % ownership in NT's 42.6% stake in Tachihi.
New Tachikawa Aircraft
(Yen in billions)
Stated
As
As further
3/30/2007
adjusted
adjusted
Cash and marketable securities
¥6.6
¥6.6
¥6.6
Other current assets
1.3
1.3
1.3
Total current assets
7.9
7.9
7.9
Long term investments and receivables
6.4
6.4
94.2
(b)
Net fixed assets
2.1
44.9
(a)
44.9
Other assets
0.9
0.9
0.9
Total assets
17.4
60.1
147.9
Total liabilities
1.8
1.8
1.8
Shareholders equity
15.6
58.4
146.2
Total liabilities and equity
¥17.4
¥60.1
¥147.9
Number of shares outstanding
11.0
mm
11.0
9.9
(c)
Indicated pre-tax value per share
¥14,778
Notes:
(a)
Mark land up to estimated pre-tax fair value.
(b)
Reflect New Tachikawa's 42.6% share of Tachihi's "as adjusted" value less carrying value of ¥298 million.
(c)
Reduce shares outstanding to reflect New Tachikawa's 42.6 % ownership in Tachihi's 24.2% stake in NT.
At ¥2,820 per share, New Tachikawa is thus trading at an apparent 81% discount to its pre-tax fair value. A few caveats and observations should be made:
This is a pre-tax value. Realization of both land and stock values could give rise to substantial taxes. On the other hand, were the two companies to, for instance, merge and continue to hold their land while maximizing its value, there’s no reason why the shares couldn’t be worth fair value without payment of any taxes.
The Macquarie values require a little suspension of disbelief. In their most recent fiscal years (ended March 2007), New Tachikawa and Tachihi reported EBIT of ¥627 million and ¥3.8 billion respectively. If we assume that all of this profit was attributable to the Macquarie land value, the return on this value amounted to 1.5% and 2.3% respectively. Considering that the companies both have substantial non-land assets, the actual return on the real estate portfolio was apparently even lower. Even given low capitalization rates in Japan and the fact that the properties are underutilized, it’s troubling that assets which are supposedly worth so much generate so little income.
Along the same lines, you’re not exactly getting paid to wait. New Tachikawa forecasts FY2008 earnings of ¥56 per share, and pays a dividend of ¥20 per share. At prevailing prices this equates to a p/e of 50x, and a yield of 0.7%.
These companies are utterly invulnerable to shareholder influence. New Tachikawa holds an effectively-controlling position in Tachihi. In addition to Tachihi Enterprise’s 24.2% stake in New Tachikawa, another, presumably affiliated, company called Tachihi Kaihatsu[1] owns 24.9%. An “owner” of either of these businesses will receive only what management wants him to receive[2].
What we know about these companies we know principally from the Bloomberg and Macquarie. There could be any number of things that would render this analysis moot. On the other hand, our experience with Japanese companies is that they’re more likely to have undervalued assets than hidden liabilities. Certainly, management hasn’t made much of an effort the highlight the value of the companies’ holdings. If you’d like to know more, we’d suggest you contact Macquarie’s Gregg Norton-Kidd (Greg.Norton-Kidd@macquarie.com).
[1] Tachihi Kaihatsu appears to be a subsidiary of Ishikawajima-Harima Heavy Industries, a publicly traded company with assets of more than $10 billion.
[2] This is somewhat reminiscent of the Bank for International Settlements which had publicly traded shares each of which represented a claim on a staggering amount of gold. The bank was majority-owned by its member countries which had no interest in maximizing its value. Pending its freezeout of the minority shareholders, which occurred in 2001, it traded at significant discounts to “fair” value.
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