Only hindsight will prove whether a buy of Koito 小糸製作所 was a right decision

 Yesterday, as the Nikkei index blasted past its previous record of 41,100.13 points by rising almost 800 in addition to the broad TOPIX index finally re-writing its old '89 peak of 2,884.80, I felt psychological pressure to buy after largely staying OUT of the market since March. As an Odakyu 小田急 buy queue missed a match by a few minutes, I settled instead on Toyota affiliate Koito Manufacturing 小糸製作所. This is a storied stock from the bubbly 1980s when Texan T. Boone Pickens allegedly tried to greenmail Toyota into buying him out at an inflated price, purchasing 21% of the company & then upping it to 26% after demanding a board seat which was refused.

 Since all these hedge fund-corporate raider types, despite their professed interest in helping minorities are only out for quick bucks ultimately, I sense that he was subtly inviting the larger manufacturer, without having to ask directly, to offer to buy him out due to a distaste for foreign invaders & the numerous successful greenmail attempts by Japanese interlopers in stocks like Fujiya 不二家  and others. His hopes dashed, the stake was sold back to Japanese speculator Kitaro Watanabe's Azabu Building, which later became de-facto insolvent at the turn of the century with the property & stockmarket downturn still unresolved.

The stock price, which had plumbed a bottom of ¥140 {35}* in 1974, rose relentlessly via a summit at ¥540 {270} in '78 &  a ¥280{140} bottom in '82, to an '89 peak of ¥5,470 {2735}, falling sharply thereafter to a ¥367 {183.5} bottom in Dec '01 before an ascent to  ¥1,859 {929.5} and a fall to  ¥450 {225} in the aftermath of the '08 Crash before climbing thereafter to ¥8,380 {4,190} and then tumbling to ¥2,557 {1,278.5} during the '20 Covid panic before almost revisiting its all-time high by cresting at ¥8,310{4,155}in Mar '21 & more than halving by Mar '24. 

Its revenue has climbed from the ¥12-14.6 billion range in the early '70s to double by '76 to over ¥32.4 billion, with EPS soaring from ¥3.4 {0.85} in '74, to ¥11.9 {3} in '76. In the 1980s, revenue broke through the ¥40, 50 & 60 billion mark through 1985 before breaching the ¥100 billion level in 1988 & reaching almost  ¥170 billion in '93 &  ¥226 billion by 1998. EPS has risen from an adjusted ¥6-7 in the mid-'80s to nearly ¥11.5, adjusted, by 1990, ¥13.4 in 1998, ¥27.8 in 2005, ¥48.5 in 2008, crashing to ¥12.6 in 2009, recovering to ¥51.8 in 2013, ¥66.5 in 2014, ¥112 in 2015, ¥144 in 2016, ¥176 in 2017, to a record ¥259.5 in 2018 then slackening back to ¥227, ¥180,¥117, ¥119 & ¥92 &¥130.9 in the years 2019-2024 while dividends per share have risen from ¥0.625 in the early-'70s to ¥1.25 in '76, to ¥4 throughout the '80s & '90s, to ¥5,6 &7 in '03-'05, ¥10,11 &11.5 in '06-'08, registering in at ¥13, 20 & 18 from '14-'16 ¥27, 48 & 46 from '17-'19, slumping to  ¥25- 28 from '21-'23 before rebounding to ¥53- 56 this year & next, translating to a middling dividend yield of 2.4% at current levels. *{adjusted figures}

Turnover climbed through the  ¥300 & ¥400 billion marks in the mid-'00s, reaching ¥470 billion in '08, falling back to ¥400 billion in '09 for obvious reasons & re-attaining ¥472 billion in '13, accelerating to ¥598, ¥706 & ¥813  billion from '14-16, maintaining at between ¥801-848 billion in '17-'20, dropping to ¥706 billion in '21 & reaching a record ¥950.3 billion in '24. NTA climbed from ¥92{23} in 1976, through ¥202{101} in 1983, ¥339{170} in 1989, ¥399{200} in 1996, ¥745{373} in 2005, ¥944{472} in 2008 & breaking through to ¥1,181{591} in 2013, ¥1,728{864} in 2016, ¥2,867{1,434} in 2019, ¥1,838 in 2022 & ¥2,183 this year. Cashflow from operating activities has reached an impressive  ¥96.37 billion, up 61% from last year, just below a record ¥98.388 billion in '17 while FCF has almost levelled back to '12-'13 levels of ¥48.8 billion, at ¥46.2 billion.

Total assets rose from ¥28.5 billion in '76, to ¥126 billion by '89, to ¥389 billion by '08, to ¥557 billion in '16 & ¥965.6 billion as of last count, with CAR climbing from under 40% to 50% in '98, dipping back to 35% in '02. climbing back to 40% in '09, 45% in '13 & a solid 69.6% now. Current assets have increased more than 3-fold from ¥178.5 billion in '08 to ¥583 billion now while total liabilities have gone up modestly from ¥204.2 billion to ¥246.3 billion in the same period, meaning Grahamian net-net has turned from (¥25.7 bil)to ¥336 billion now, equating to ¥1,045 a share, with net cash per share at ¥897. Net current assets have exploded by over  7-fold since'98: ¥55 billion  to ¥390 billion now.

It has utilised this liquidity to be aggressive with buybacks, at one point owning 13,804,300 of its own shares{4.29%} & ranking 3rd in its own shareholder register, before presumably cancelling them, reducing its paid-up outstanding shares from 321,578,872 to 307,833,172. 

A little worrying, however, is the drop in ROE from 22.4% in '18 to 6.3% in '24, less than half the 14.8% level in '15, perhaps exacerbated by the China segment, about 10% of the pie, experiencing a 72% drop in sales from record levels a few years back. The smaller European segment, slightly over half of China's has reversed from a loss of (¥1.29 bil) in '21 & (¥2.68 bil) in '22 to +¥2.17 billion now while 'other' geographical segment is a bright spot with +¥1.76 billion in '24 & +¥1.01 billion in '23 after losses in the previous 5 years. Asia ex-Japan, China & 'others' revenue set a record in FYE 3/'24 with a 16% market share  and +¥15.02 billion operating income, while North America, with a large share 30% of turnover, has negligible profitability. Japan, with the lion's share at 37%, has seen a 40% drop in profit to +¥33.9 billion from a +¥57.0 billion peak in '19, yet still above '15-'16 levels, with the +¥44.1 billion in '17,+¥55.4 billion in '18 significantly higher  & the +43.5 billion in '20 as well as the +¥36.5 billion in '21 marginally better. FYE 3/'24 itself is 10% & 38% above the FYE 3/'22 & FYE 3/'23 levels respectively, perhaps marking a profitability trough last year. 

Having no experience with the LED lamps & other automotive lighting products, nor with the aircraft parts segment & electrical equipment segments, I can't really comment reliably on its prospects but the company is apparently a leader with 60% of market share globally, no doubt helped tremendously by 20% owner Toyota. Its export ratio was only 1% in the '70s, but expanded to 4% in the '90s and if its performance is anything to go by, seems to benefit from the slumping yen as it handily outperformed the Nikkei since the yen more than halved from 76 to today's 161 to the dollar in the last 13 years.

Technically, there could be a bullish triangle building up to a target of ¥2,700-3,000 by 2025.

Based on the EPS, dividend yield, revenue & NTA metrics going back over the years, the extreme to moderate undervalued range of Koito is estimated below:

EPS:  ¥2,165[average '08 levels]  -  ¥2,346[extreme '09 low]  - ¥4,200[extreme '97 low]

DY: ¥1,260[extreme '09 low]  -  ¥2,583

Rev: ¥535-¥875-¥947-¥1,512[extreme '09-'12-'98-'20 lows]  -  ¥2,016[extreme '82 low] -¥2,266[extreme '74 low] - ¥2,952 [average '15 levels]

NTA:  ¥1,040[extreme '08 low] -  ¥1,946[extreme '20 low] - ¥2,316[extreme '97 low]  - ¥2,844['95 low] - ¥3,593[extreme '74 low]