I have been waiting a year-and-a-half to find some way of working Peter Seller's sidekick, Kato, into this blog, who apart from being very amusing is consistent with my predisposition towards always being on the lookout for something that might blindside me. Now, with the clarification of just how cooked the books Katokichi Company's (TSE Code #2873) books actually were, founding family member and now-former President Yoshikazu Kato has decided to fall on his sword (metaphorically speaking, that is) and stepp down.
The total amount of faked sales were estimated at USD$1bn over the previous 6 years, reasonably in excess of initial estimates and amounting to somewhere between 5 and 10% of annual company sales. While I believe there will be phoenix-like value emerging from the ashes, I do believe that the eventual restatement of prior years' accounts will keep on a lid on things and cause further price distribution from liquidation and so would take any meager short-term profits, and as the old saw goes, get out of Dodge...
This is a follow up to the discussion we began on the first Katokichi posting.
ReplyDeleteFirst of all, we forgot to declare our interests. In my case none in either Katokichi (KK) or Toyo Suisan (TS). TS is a good comparison because it has a similar sales volume to KK and also a similar product line.
Second, I'm a private investor, so I don't have time for short term trading strategies, though I am grateful for any bone I'm thrown. Congratulations! You did get your forecasted dead-cat bounce with Kato's exit.
Regarding cash flow analysis, I think it's a case of horses for courses. KK's poor cash generation vs. sales was an indication that sales weren't being converted to cash. For those who don't understand how a carousel fraud works, sales receipts (Income Statement) change hands but cash and stocks stay put.
I think FCF analysis is most revealing as a complement to ROI (Operating Profit/[Equity + Debt]) for businesses that generate profit through capital investment: i.e. manufacturers. I also regard growth in Equity as a better guide to growth than Sales growth; and of course ROI is linked to growth in equity. TS has higher FCF/EV, Equity growth and ROI than KK, even at KK's current share price.
KK might be a recovery play as KK's new boss indicated in his first press conference that he would like to end KK's diworsification and focus on the core businesses, frozen foods and noodles. But, in Japan, you know, these things take a looong time....
The final word from my wife, who I asked if she would like to take a punt on KK.
"I don't like their products," she said referring to one of their main products, ready-to-fry bread-crumbed prawns, "they're all bread crumbs and no meat."
anonymous - thanks for the detailed comment, and insight. I do think you mean growth in 'equity "per share"' instead of just total equity, and I agree that sales growth is ineffectual by comparison (though it can systematically add predictive information, albeit not as much as other factors). In Japan, where large empire-building is seen as more virtuous than building a smaller, but more rewarding empire, your caveat is particularly apt.
ReplyDeleteAs for KK, I was initially focused upon an opp that was more than a deadcat bounce, but once the news was out, and the facts revealed more revenue conjuring and yet-be-revealed restatements , I now believe that even the more courageous investors will stomach until some months away. I believe as price fades back again, deep-value chaps will have another look. again setting up an interesting risk v. reward opportunity, chintzy prawn content, and KK's dubious culinary virtue notwithstanding.