Daido Metal: Heavy Investment Burden Prompts Capital Raise but Can the Company Restore Margins?

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Director, Pearl Hill Advisors

Nicholas Tanner

Director

Pearl Hill Advisors

Equity Bottom-Up

<p>Daido Metal is a leading maker of bearings for vehicle (including ships) engines. It dominates this market globally. Both sales and profitability are on an improving trend (helped by a recovery in construction machinery and a bottoming out in demand). The shares are cheap and have been further depressed by management recently selling the 11% stake it held in itself into the market (for working capital and to pay down debt). The shares now yield 3.2%, trade on 9x this year’s conservative forecast and 0.8x book. Next year we would look for 20% profits growth, putting the shares on about 7x. The shares are off 30% since the announcement of the August placing. A small cap buy at current levels.</p>

Daido Metal is a leading maker of bearings for vehicle (including ships) engines. It dominates this market globally. Both sales and profitability are on an improving trend (helped by a recovery in construction machinery and a bottoming out in demand). The shares are cheap and have been further depressed by management recently selling the 11% stake it held in itself into the market (for working capital and to pay down debt). The shares now yield 3.2%, trade on 9x this year’s conservative forecast and 0.8x book. Next year we would look for 20% profits growth, putting the shares on about 7x. The shares are off 30% since the announcement of the August placing. A small cap buy at current levels.

Daido Metal (7245) Recent Offering Has Depressed Shares, Now Is Good Time to Buy This Small Cap Name