Newsletters - Asset Value Investors

AJOT

A-One Seimitsu • Q2 2022

A-One Seimitsu, one our smaller positions (3.2% of NAV), was the second-largest contributor over the period adding 25bps to returns with a +12.3% rise in the share price. A-One Seimitsu produces manufacturing tools including collet chucks and cutting tools, mainly focused on replacement demand. It is famed for its fast turnaround times, crucial when a customer’s factory urgently needs a replacement part. Over the quarter A-One Seimitsu announced its first mid-term plan, forecasting +61% profit growth over the next 5 years and crucially, for a Company where cash accounts for 73% of balance sheet assets, a -19% reduction in shareholder’s equity. As a start to reducing its cash balance, A-One Seimitsu announced its intention to pay a ¥100 dividend which amounts to a 141% pay-out ratio and 6.0% yield. As the second-largest shareholder owning 11.0% we have been working closely with A-One Seimitsu’s President who has been a great advocate for improving the share price (in contrast to the Founder). Trading with net cash covering 79% of the market cap and on an EV/EBIT of 5.8x, there is plenty of upside as we expect shareholder returns to continue increasing.

AJOT

A-One Seimitsu • Q2 2021

A-One Seimitsu – being the force for change

Our shareholder engagement efforts transcend the entirety of AJOT’s portfolio, even to our smaller 2.9% position in A-One Seimitsu. A-One manufactures collets (used to grip objects) and resharpens tools for clients across a variety of industries. Many of these tools and parts are essential, such that the machines that use them cannot operate without them. Therefore, short lead times are essential, something on which A-One prides itself. By operating a lean employee structure with the same person taking the order, sending it to the factory then writing the invoice, orders can be shipped out on the same day, while competitors can take a week.

A-One’s focus on quality and speed has given it a dominant 60% market share, with even some of its competitors sending more specialised orders to A-One. A-One does not compete on price and has generated an average operating margin over the past 10 years of 27%.

The market cap of the company is covered over 100% by net cash on the balance sheet, meaning that we are effectively buying the operating business for free. The low valuation is driven by non-fundamental factors, such as A-One’s low liquidity, high cash backing, poor IR efforts (which is defaulted to the already busy President) and simply being too small for most funds.

We have been engaging, rather successfully, with the Company. The President, and other members of the management team, have been receptive to our advances, and we speak with them numerous times each month. Last year they conducted a 2-for-1 stock split to help improve liquidity, increased the dividend by 43% for a 75% payout ratio and agreed to our suggestions on how to modernise the website, which had not been updated since 2001. Unfortunately, these actions have done little to rectify the undervaluation, and the Company, with the higher payout ratio, is trading on a healthy dividend yield of 3.7%.

A-One should be taken private. Such a suggestion is less alien than it might have been in the past, and the environment for privatisation is quite accommodating. We are sure that the management of A-One could privatise the Company with no capital, funded by cash on balance sheet and some debt. A 50% premium would put the Company on an EV/ five-year average EBIT of 7.7x and, excluding cash, a five-year average FCF yield of 10.0%. The hurdle, although not insurmountable, for privatisation is the 82-year-old Founder who controls 26% of the Company. However, we own 10% as does another like-minded shareholder.

While we evaluate options to crystallise the value of A-One we are quite happy holders, exposed to a high-quality business, and we can afford to be patient.

AJOT

A-One Seimitsu • February 2020

Over the month we declared a 5% stake in A-One Seimitsu. It is a manufacturer of collet chucks and cutting tools. While somewhat cyclical, it has a market share of around 60% and achieves an impressive 30% operating margin. With cash accounting for 99% of the market cap, investors are attributing very little value to the operating business. We have been engaging with management and hope to encourage better balance sheet management.