KG Intelligence

KG Intelligence CO., LTD

Japan

Tokyo: 2408

Market Cap US$21mm

¥326/share

Key Points

• Small conglomerate

• Cash - all liabilities > current market cap

• No debt, operating at about breakeven for FY21 

• Negative enterprise value, a net-net (P/NCAV .65), and a very low PTB (.45) 

Like Ikegami Tsushinki from three weeks ago, today’s idea is a Japanese deep value stock. KG Intelligence CO., LTD. is in the publishing and service industries. The company operated at about breakeven in 2021 after years of loss. This is a tiny foreign stock. There is no English-language version of the company’s website.

In other words, this is precisely the kind of stock that might trade at a steep discount to a conservative estimate of liquidation value. And KG absolutely does. You could hold the stock as part of a negative enterprise value strategy, a net-net strategy, or a low PTB strategy.

The company keeps substantial cash reserves on the balance sheet. With a ¥2.4bn market cap minus ¥4.5bn of cash and equivalents, we have an enterprise value of -¥2.1bn (with no debt and no preferreds). To evaluate this from another angle, consider this. If a private buyer were able to purchase KG outright at the current price, that buyer could pay off all liabilities, give away the operating business, and still realize a 38% gain just from the remaining value of the cash. Simply buying a basket of microcap stocks that trade at a negative enterprise value is an effective quantitative deep value strategy. Since over half of my subscribers have signed up in just the past two weeks, I’ll link an article again that has a backtest of NEV stocks (but keep in mind that the article deals with average return, not CAGR).

KG Intelligence trades at 45% of book value. It’s a Graham-style net-net, with a P/NCAV of .65, which comes in just a hair under Graham’s cutoff of ⅔ of NCAV. This is a conservatively-run business, with no debt. The balance sheet is light on inventories and receivables, and over 90% of current assets are made up of cash–that’s certainly favorable to us as deep value investors. Cash is the best kind of current asset.

The only time that this kind of aggressively low valuation would be acceptable in an efficient market is in cases where investors expect an imminent destruction of balance sheet value. While KG has sustained modest losses in recent years, the company posted a very small net profit in FY21. The company’s substantial cash pile, which is an integral part of the thesis (accounting for 69% of total assets), has not dipped below ¥4bn in the last four years. YOY shareholder equity was virtually unchanged from 2020 to 2021. There’s no reason that I can identify as to why this stock should trade at these prices.   

As far as the business itself goes, we must rely on basic information only. The company doesn’t have an English-language version of its website, so I won’t have much insight to offer here. It seems that the company’s legacy business is publishing, but it’s a bit of a mini-conglomerate. The publishing segment deals with the job/career area (publishing physical job listing circulars, hosting job fairs, and maintaining job search websites), the wedding industry (bridal sites), and recreational fishing (hobby magazines and websites). The company has a segment that provides various business services (web design, HR services, printing, customer surveys, etc.), and there’s also a landscaping business.

The financial performance of the company is uninspired, and physical publishing is in secular decline. Do we need a high-growth industry or a detailed understanding of the business to have an attractive investment? I don’t think we necessarily do at price levels that are low enough. This is old-school Graham.  

A final consideration: 46% of shares are held by a company called “Ohana Co. Ltd.” It’s unclear to me which of the several Japanese companies called “Ohana” this is referring to, but this appears to be an example of Japanese cross-shareholding. With another firm holding so much of KG, I would view it as unlikely that any major shakeup would come in the form of an activist or a review of strategic alternatives. This is just a tiny, conservative Japanese firm with no discernible catalyst on the horizon. Sheer value is all you have to stand on. You buy, and you wait a few years for it to migrate back up. And maybe it will, and maybe it won’t.  

—

Disclosure: I have no business relationship with any company mentioned. I am not a financial advisor, and this post is not financial advice. This post is for informational purposes only. Readers should conduct their own research. Purchase of any security involves risk of permanent loss of capital.