6947 Zuken

Zuken sells software engineers use to design circuit boards and wiring for cars and machines. Electric vehicles and complex chips mean more wiring to design, and maintenance contracts renew yearly.

▲ Joint projects with Resonac and IBM pull Zuken into designing advanced chip packages — the fastest-growing corner of electronics.  ▼ Its main Japanese customers are the weakest buyers of its newest product line, and thirty years abroad produced only one breakout product.

Zuken's E3.series is the standard tool for wiring design in European trains and power grids, and customers renew rather than retrain. But Cadence and Siemens dominate the next market Zuken wants.

▲ The Asia segment earns a 29% margin, proof the software model works abroad. Once engineers certify on a toolchain, switching is costly.  ▼ The customers Zuken wants next already use Cadence and Siemens tools. Its claim of 15% annual market growth is asserted, not evidenced.

Zuken holds ¥36.1bn of net cash. It completed two ¥3bn buybacks, set a dividend floor tied to equity, paid out 134% of profit this year, and US fund Artisan built an 8.1% stake.

▲ A large foreign fund now sits behind a return framework that is already drawing down the pile, slowly.  ▼ Even after all that, cash still grew last year. Ten years of talk about acquisitions produced one small deal, and planned returns on equity are slipping.

The business sells for 9.1 years of operating profit. Its capital earns 13.1%. Net cash is 37.3% of the market cap; 55.5% of profit goes out as dividends. Today's dividend yield is 3.3%. Even paying out all of its profit, the yield at today's price would be 5.9% — below the 6% floor, so the case rests on growth and the other squares. At the current payout, the cash pile alone equals today's market cap in about 23.9 years. How this valuation floor works →