Auto OEMs are not the only way to benefit from the resurgence in interest in Japanese autos. There is a cheaper auto distribution company with higher operating growth prospect: Zero. Its major customer is Nissan, although Nissan’s importance is consistently declining. Thus, Zero can be an indirect beneficiary of the Nissan/Honda tie-up.

Zero is an automotive logistics company. Nikkon is the closest peer whose main customer is Honda. Senko distributes a wide range of products ranging from chemical to apparel and consumer goods.

Zero’s PE is the lowest at 6.7x among the three despite its highest OP growth over the last year and highest ROE. Zero’s FY6/24 ROE was 12x and its estimated ROE is 18x

Management is aware that their low multiples are due to the following:

1) Low liquidity:

Zero’s top 3 shareholders are:

Zenith Logistics: 50%

SBS Hldgs (2384) 20.3%

Tokyo Marine 3.6%

Tan Chong International Ltd. (TCIL), based in Singapore, through its subsidiary Zenith Logistics, began investing in Zero in 2004, with ownership reaching 22.91% before its takeover bid (TOB) of Zero in May 2014. Zenith Group currently owns 50%. TCIL’s ownership is driven by its goal to expand its presence in auto transportation in Asia. Zero is receiving operational benefits for its ASEAN expansion from its parent. Therefore, a reduction in TCIL’s ownership may not be forthcoming.

Also, management believes that SBS will not reduce its holding of Zero.  But, it is possible for Tokyo Marine to cut is holdings.

2) Low dividend payout:

The company announced a Payout increase from 25% to 33% (average for the listed companies) starting FY6/25.  The dividend yield now stands at 5.2%.

3) Unstable profitability and ROE:

As a transportation company, Zero is susceptible to swings in oil prices (mainly diesel prices) and driver shortages in Japan. The company has laid out a strategy to tackle these challenges and grow further. Since the company’s ROE reached 11.8% as of FY6/24, the PB ratio should reach 1x once investors recognize that the company can restructure its operational structure to continue generating steady profits.

My detailed report focuses on the company’s efforts to grow from here. This report is available for my clients.  Please consider becoming my client for $2,500/6 months.

 

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