CLIP Corp (JP:4705): A High Quality Japanese Stock at a Crazy Cheap Price

Founded in 1981, Clip Corp operates cram schools which provide tutorial services to elementary and high school students. And it also operates soccer schools which provide services to children from babies to early elementary school students. These two businesses are the Clip’s bread and butter. It also engages in the business of home delivery of boxed lunches. A segment management wants to expand in future.

Haven’t tasted their boxed lunches but the financials look sumptuous!

Clip Corp's stock currently quotes at ¥ 956 and roughly 4.54 million shares outstanding give the company around ¥ 4.34 billion market cap.

This 4.34 billion yens becomes an interesting figure when you peek at its latest balance sheet which nestles ¥ 4.8 billion cash. Long term debt is zero. Total liabilities stand at ¥ 917 million.
That comes out to be ¥3.9 billion in net cash. And 90% of the company’s market cap soaks in this hard, cold cash. Receivables and inventory make up tiny portions in the balance sheet at ¥ 18 million and¥ 104 million respectively. Total assets stand at a tad above ¥6 billion. All tangible.

A quick glance at the historical balance sheets reveals that the company has always been substantially unlevered. Assets have always sat closer to equity. For the past 5 years the Debt /Equity ratio has been decreasing from 0.28 to the present 0.17.
Overall it sports a liquid, unencumbered balance sheet which boasts of its good quality tangible book value per share of ~¥1130. In a nutshell, we have an excellent quality of assets here.

Let’s check its operating business.

Clip Corp’s 9 year sales and EBIT record is given below:
(all figures in millions of ¥)

Year  Sales EBIT  EBIT margin

2011  4810 983          20.44%
2010  4480 779          17.39%
2009  4470 949          21.23%
2008  4680 1140         24.36%
2007  4720 1190         25.21%
2006  4600 998          21.70%
2005  3990 1000         25.06%
2004  3340 703           21.05%
2003  2910 610           20.96%

A decent sales track record coupled with above average and consistent EBIT margin makes this a very good business. And it shows that the company enjoys pricing power.

Of course no profitability picture is complete without a tale of two metrics- cash return on invested capital and free cash flow margin.
Cash return on invested capital (CROIC) has been calculated by using the following formula:
Free Cash flow (Cash flow from operations –capital expenditures) divided by invested capital.
Where invested capital is Total Assets-(intangibles + cash and investments)

Year Invested capital   Free cash flow  CROIC
2011        1080               756              70%
2010        1088               606              56%
2009        1064               582              55% 
2008        1021               635              62%

And below is Free cash flow margin record of previous 5 years:

Year   Sales     CFFO      Cap-ex         FCF        FCF Margin

2011  4810         783         -26.53        756      15.73%           

2010  4480         621         -15.26        606      13.52%           

2009  4470         599         -16.76        582      13.03%           
2008  4680         643          -7.67         635      13.58%           
2007  4720         780          -14.67       765      16.21%           

Both are excellent.

The business cranks out solid ROIC and spits off tons of free cash.

Return on equity is around 11 % this year .Historically it has been in the range of 20%-13%. This shows that the stock should be worth more than the book value.

The company is dividend paying and at the current price dividend  yield comes out to be 4.18 %. Not at all bad.

Let’s look at its free cash flow generation.

The free cash flow per share (in ¥) generated by the business over the past 5 years are as follows:

Year                             fcf per share
2011                              168.48
2010                              134.91
2009                              129.67
2008                              141.50
2007                              170.45

That’s an average of ¥149 per share. Shares outstanding have remained the same over the past 9 years .

The Enterprise value per share comes out to be ¥95.32
Do we need an intrinsic value calculation looking at EV/ 5 year average FCF of 0.64?

Apart from Ben Graham’s famous Mr Market metaphor I love the simile he uses which you can read on the page 22 of 1940 edition of Graham’s Security Analysis

To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight.

And in this case the man is not just heavier.

He’s obscenely fat.