Tiemco Ltd (7501:Tokyo)

  • Japanese net-net trading at 34% of NCAV (including LT investments, mostly securities)
  • The company has recently bought back shares.
  • Under the radar: Databases (e.g. Bloomberg, Thomson Reuters) have wrong numbers. They do not properly account for treasury shares and thus overstate Tiemco’s market capitalization by 35%. This leads to difficulties in finding this opportunity using stock screeners.
  • Potentially less sophisticated investor base and limited arbitrage due to very small size. The actual market cap at ¥483/share is ¥1.2 billion ($11 million).
  • Management expects profitable FY 2016 (ending November, 30). NCAV has been stable over the last years.

 

 

Tiemco designs, import, export, and retails fishing goods including lure and fly fishing gears. Tiemco also sells outdoor clothing such as vests, waders, jackets, and goods used for fishing. Source: Bloomberg

Like many other Japanese corporations, Tiemco owns treasury shares. Electronic databases calculate the market capitalization of Japanese corporations using the number of issued shares, not, as would be correct, the number of shares outstanding net of treasury shares. This results in massively upward biased valuation metrics for corporations that own a lot of treasury shares. Therefore, net-nets of that category are hard to find using quantitative stock screeners, which use the numbers supplied by the database. Therein lies the opportunity for mispricings.

Tiemco has recently bought back shares at very cheap prices. As of February 29, 2016, the company owns 863 thousand shares. This is roughly 26% of the 3.340 million total number of issued shares. To illustrate the distortion of valuation metrics that result from using the wrong market cap, consider the discount to NCAV. Using the market cap supplied by the database, one would conclude that Tiemco is trading at a 49% discount to NCAV — interesting, but not quite the 62% actual discount. (Both calculations do not include long-term investments, which are mostly securities, in NCAV.)  Assuming the NCAV approximates fair value, the apparent upside of 96% is much less than the actual upside of 163%. Below is the translated balance sheet and the calculation of net current asset value (NCAV), tangible book value (TB), liquidation value (LV), and net-net working capital (NNWC):

 

2016_02 BS TiemcoSource: Company filings and http://www.kaijinet.com/

Management guides to ¥2.980 billion in sales, ¥49 million in operating income, ¥52 million in ordinary income, and ¥41 million in net income for the fiscal year ending in November 2016.

The Founder and Chairman, Sadahiko Sakai, owns a significant amount of stock. The President, Seiichi Sakai, owns a moderate amount of stock.

2016_02 insiders Tiemco

 

Disclosure: I’m long 7501:Tokyo.

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