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Mar 172011
 

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.

Liability

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.

Cleanup

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.

Other Factors

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.

 

Tell everyone, yo!

  23 Responses to “Tokyo Electric: I’m Actually Thinking About Buying”

  1. I’ve already asked my financial advisor to find some reasonable Japanese companies to take a risk on. It’s an awful humanitarian crisis but also one hell of a financial opportunity.

    • Keep me posted on which ones your advisor thinks are decent.

      • Did you get in on TKECF? Trading well below 800Y today. I went in big this morning after the free-fall this morning. Hoping it works out…

        • I didn’t. Glad I’ve waited, the stock is in free fall.

          The rumors now are that the Japanese gov’t will nationalize them. I doubt that will happen, but I could see them guaranteeing debt or stepping in with an cash infusion.

          This one is not for the faint of heart. If I thought it was a buy at around 800 yen, it should be a screaming buy at 466 yen (where it closed). Yet I’m not sure if I can pull the trigger. I have no logic for this either, it’s just a gut thing.

          • I bought TKECF which is trading on pink sheet US at around $9 but looks like it is still in free fall. I will hold on to my losses and hope it could reverse to $10-$11 but not sure how long will it take. Does TKECF provides dividend ???

  2. You’re not drunk, you’ve taken some smart pills.

    This is an absolute disaster, a catastrophe for sure but investors could no doubt capitalize on this financially.

    Let us know if you pull the trigger on the trade.

    I bet some reactors are up and running next week, Japan needs them to be.

    • Like Potato mentioned, the stock was up 20% in Tokyo overnight. I’m waiting to see if I can get it below 800 Yen/share. I’ll let you all know if I pull the trigger.

  3. I hate to say this, but I agree with Adam.

    Such is the nature of capitalism…

  4. Nice post, I was going through the same thought process today. Decided to sleep on it, but now I see that it’s up ~20% on the Tokyo exchange tonight, so maybe not quite as lucrative.

    The shutdown of the nuclear plants represents a pretty hefty portion of Japan’s electricity generating capacity, so Tepco should get some better utilization rates from its fossil fuel plants, which will to a small extent help offset the hit from fukushima.

    The only weak point in the analysis is the clean-up cost: does that count as a natural disaster liability? Will the government step in and foot the bill for Tepco? Or will it be much higher? Three Mile Island was really a non-event: a partial meltdown with some steam release. The clean-up was strictly at the plant itself. So here we’ve got 3-4 reactors to clean up, 3 of which have sustained more damage than TMI, so I’d guesstimate ~$5B right there (that might be way too low if the ~$1B for TMI is in 1979 dollars).

    To say the reports have been mixed is an understatement, but there have been some reports of Cesium escaping, in which case there may be soil contamination nearby, which might require a much wider cleanup effort, along the lines of Goiania (stripping a layer of topsoil over a large area, putting it in storage containers, demolishing contaminated buildings nearby, etc). Still, my back-of-the-envelope calculation gives me single-digit billions, and that’s more than priced in at the current price, even with tonight’s substantial rebound…

    • Clean-up costs are basically a crapshoot. I can see how they could be higher than the 3 billion. Or they could bulldoze the whole facility and have clean-up costs maybe a little less than 5 billion. We’re both really just guessing.

      The 20% move up sucks. This thing will be volatile for the next little while, so I bet it’ll get back down below 800 Yen per share.

      • And so it has… I’m not sure the news is fundamentally that much worse than last week, and it looks like a decent margin of safety now, so I think I’ll be diving in now.

  5. […] Dividend Ninja had a nice summary about the events in Japan, from a dividend investor’s point of view. For some reason, he doesn’t seem bullish about Toyko Power. […]

  6. Nice post man! (and dig the new look) I’m a big fan of buying stocks in crisis, it’s a pure greed play. When there is nothing but fear, it’s usually the bottom ;) If I had cash I would have bought uranium stocks on Tuesday morning and made a nice little profit for the week.

    I wrote a post about buying stocks in crisis back in October, I made money in 2010 buying stocks that were decimated with bad earnings for example. And now I’m considering buying at least a Japanese Index Fund next week.

    One thing you do have to understand about investing in Japan, is the rules are far different than N.A. and Europe. There is much systemic corruption between corporations and the government, inlcuding falsification of records etc. (gee does sound like NA doesn’t it?).

    Good luck with this stock if you buy it and keep us posted :) I too pondered buying Japanese stocks for next week.

  7. […] can review about buying batch in Tokyo Electric during Financial […]

  8. HOW IN THE HELL DO I BUY THEIR STOCK? ITS NOT AVAILABLE THROUGH MY BROKER, SHAREBUILDER, OR ANY OTHER THAT I AM LOOKING FOR

    • IT TRADES ON THE OTC MARKET UNDER THE TICKER SYMBOL TKECY. HOPEFULLY THAT HELPS.

      ALSO, WHAT’S UP WITH ALL CAPS?

  9. Please excuse my lack of knowledge, but what is the best way of buying this stock from a newbie perspective. Im in the Uk, and not sure how to get started. It seems really difficult to purchase stock on the TSE from here, so is there a way of buying in via the US? Also I read below its TKECY we should buy into but then I saw a mention of TKECF, so which one is it? and what’s the difference?

  10. […] can read about buying stock in Tokyo Electric at Financial […]

  11. Hi, Tepco price hits 208yen now.. I would like to hear your opinions.. Thanks:)

    • I put up a post on it when I sold. Basically, I thought the point of weakness was going to be the eventual clean-up costs, but that shouldn’t have been enough to bankrupt the company, so a speculative position was warranted. There was a law protecting them from liability (as mentioned in this post above), so that shouldn’t have been a concern. However, the Japanese government has chosen to break the law (or, interpret it into nothingness), and was coming out doing silly things like asking debt-holders to take losses. I know that the situation is pretty tense over there, and the government officials are probably losing their heads and saying things without thinking, but debt-holders don’t take losses until after the equity is worth zero. So everything the government has said and done so far suggests that they are going to allow/force TEPCO stock to go to zero.

      As an aside, I think it’s a fool-hardy move by the Japanese government. That law existed for a reason. It’s bad short-term politics to let TEPCO off the hook while people are evacuated from their homes and scared, but it basically kiboshes any future development that depends on such liability caps in the face of massive natural disasters (nuclear plants in particular, but potentially even things like oil refineries, or apartment buildings, or life insurance).

      • I agree with all of this. Once I heard the government say those silly things, I decided to stay away.

  12. I’m with you 110%. I’ve been slowly buying TEPCO shares since 3/28, and today at $2.65 I just doubled my position. As you pointed out, Japan is extremely limited in its ability to obtain energy resources. In fact, one of the reasons they attacked Pearl Harbor was because after WWI, the U.S. and other Western European states were blocking Japans access to petro. As the biggest energy producer in Asia, the fourth biggest in the world, and with its ties to the Ministry of Economics and Energy, it’s the equivalent to Goldman Sachs and the U.S. Treasury. TEPCO is simply too big to fail.

    Peter Lynch, famed Mutual Fund investory, has this to say: “But the utilities with which I’ve done the best have been the troubled ones: At Fidelity, we made a bundle for our shareholders on General Public Utilities after the Three Mile Island disaster…”

    And as a final note, both Fidelity and Blackrock have increased their positions in TEPCO since April by over 10x:
    http://sg.news.yahoo.com/contrarian-foreign-funds-buy-tepco-stock-nikkei-173039875.html

  13. […] ratio is over 200%, as the government recently borrowed heavily to fund the cleanup costs of the Fukishima reactor mess. Last year, their deficit was over 10% of GDP, and like America, there’s little pressure to […]

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