Am I drunk? Or maybe high on multiple other drugs?
The Japanese nuclear situation is dire. Increased radiation levels have been detected as far away as 20km from the affected plant. Foreign governments are urging their citizens to stay 80km away, while the Japanese haven’t budged from their 20km evacuation zone.
The company that owns the plants, Tokyo Electric Power Company (TEPCO) is now attempting to build a temporary power line to the backup pumps, so the pumps can start to pump water into the affected cores, cooling the hot nuclear fuel. I’m not sure why this wasn’t the plan from the start, maybe this plan will take a few days to happen and TEPCO didn’t want to wait that long to solve this daunting crisis.
The title isn’t misleading. This may be the opportunity of a lifetime to get a world class utility as rock bottom prices. Or, I’m completely insane and I’m throwing my money away. Here are my reasons why I think the company will recover.
Cheap On So Many Levels
The company closed on the Tokyo Stock Exchange at 812 Yen at the close of Thursday’s trading. The company was at approximately 2200 Yen right before the crisis. Like any contrarian investor, a 60% decline gets me a little excited.
The company is sitting on 13.2T Yen worth of assets. Only a little over 1.5T Yen is dedicated to their nuclear division, with 650B of it representing the value of their nuclear plants, with an additional 900B the value of their nuclear fuel. Since their nuke plants are so old, most of the value has been already depreciated.
It’s pretty obvious the affected reactor is worthless. For the sake of being conservative, let’s value all the nuclear assets at zero.
Book value works out to 1400 Yen per share with the nuclear assets stripped out. The company trades at a 40% discount to book value.
Net earnings in 2009 were a little less than 200 Yen. Obviously the company won’t do that again in the near term, but it gives us a gauge of what potential profitability can be once the company recovers. They also pay a dividend of 60 Yen per share, which I’m assuming will go away very quickly.
The bottom line is from a balance sheet perspective, the company looks quite enticing.
The obvious red herring of TEPCO is the liability issue. There’s two reasons why I think investors don’t have to worry about it.
The first is that Japanese utilities have zero liability because of natural disasters, thanks to the Japanese Nuclear Act of 1961. If there is a liability issue, the government will be the entity ultimately responsible. By removing that potential liability, they took the risk away from industry, which undoubtedly encouraged investment in nuclear power.
Different countries have dealt with the potential liability problem in different ways. In the U.S., the industry has a self insurance program, with each reactor being forced to pay premiums to a pool, with the government footing the rest of the bill if the pool can’t afford all the liability claims.
There will definitely be clean up costs. Nobody knows how much they’ll be, or how big of a liability that’ll be for the company. What did it cost to clean up the mess caused from Three Mile Island?
It took 12 years at $973M to clean up Three Mile Island. For the sake of caution, lets triple that amount as a cost for cleaning up in Japan and that the company will be on the hook for every penny. If you convert $3B US to Yen, you get 270B Yen (using an exchange rate of 90 Yen/dollar, a very conservative estimate considering the current exchange rate is 78 Yen/Dollar). The worst case scenario for clean up costs is 400 Yen per share, putting a worst case book value at a 20% premium to current levels.
Since the problem will undoubtedly take many years to clean up, the company won’t have to pay out the entire cleanup cost all at once.
The nuclear safety commission of Japan will most likely push for additional safety precautions at existing plants. This will cost the company something.
As I wrote about the other day, the Japanese economy is too dependent on nuclear power for the government to shut down existing reactors. There are several nuke plants with plans to build over the next 5 years (including two from TEPCO) that I suspect will get scrapped, at least for the time being. If Japan doesn’t build these nukes, where’s the power going to come from? And no, a long-ass extension from China isn’t going to cut it.
I suspect the affected plant will be mothballed, which was planned anyway. It’ll never produce another megawatt again, and the land will be so contaminated that it won’t be worth anything either.
Another unknown is the cost to repair the other nuke facility that was having problems. Fukushima II is reported to have been shut down safely, however there’s not a whole lot of information regarding the damage to that facility. Currently all the reactors there are out of service. Who knows when they’ll be back up and running.
Can you guys think of anything I’m missing? Am I insane for even thinking about this? Let me know in the comments.
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