Thinking Points

  • Infomart (TSE: 2492) offers B2B platforms which play an important part in its customers’ day-to-day operations.
  • The company’s recurring nature of revenues and its attractive value proposition for customers makes Infomart watchlist worthy.
  • That said, at 1,120 yen per share, Infomart trades at a lofty 69.6 EV/EBIT. I will revisit Infomart when share prices come down to 550 yen per share or if the company announces a change in its software pricing.

Overview

Infomart (TSE: 2492) is a business-to-business (B2B) platform provider primarily focused on the food industry in Japan. The company offers cloud-based solutions for business matching, quoting, ordering, invoicing, and data management. The most attractive aspect of Infomart is its business model. Infomart’s solutions support day-to-day operations of its customers, which makes it difficult for customers to switch to other solution providers. Additionally, the company has a recurring revenue model, with 95% of revenues generated through monthly system usage fees. This is highlighted because it is an important figure later in this article.

Infomart operates through four segments: Ordering, Standard Database, ES, and Other.

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Revenues have gone up and to the right for over a decade with some fluctuation in operating performance. Though Infomart management has a history of setting aggressive mid-term targets and missing, this has not affected the market’s optimistic sentiment. Before further reading, it is worth noting that Infomart trades at a lofty 69.6 times EV/EBIT multiple.

The company seems expensive on just about every measure you can think fo. According to Nikkei (Japanese), 48.9% of shares are held by foreigners as of December 2017. This suggests that the Infomart story is well known. Perhaps, some investors would already pass on Infomart. However, I feel that Infomart’s business quality is high enough that the company is worth researching and keeping on a watchlist, even if it does not lead to an investment in the near term.

Infomart’s business

First, let’s start with a brief description of each business segment.

Ordering

The Ordering segment primarily caters to food retailers and wholesalers. Infomart’s ordering solutions helps both buyers and sellers manage orders on a digital platform. In fiscal 2017, Infomart rolled this system out to manufacturers as well.

Source: Infomart Fiscal 2017 Earnings Presentation

Here is the list of fees for the Ordering segment:

Source: Infomart Fiscal 2017 Earnings Presentation

 

Standard Database

The Standard Database segment helps food retailers, wholesalers, and manufacturers build and manage standardized data. For example, a food manufacturer can have Infomart setup a product profile for its burger patties. The database would record information like ingredients, allergens, product net weight per package, nutrition facts and more in a standardized format. When a wholesaler requests information on burger patties from the manufacturer, the information is readily available in an easy-to-understand, standardized format.

Source: Infomart Fiscal 2017 Earnings Presentation

 

ES

The ES segment helps food retailers, wholesalers, and manufacturers with invoicing and new business. To be frank, I am not entirely sure why this is offered separately from the order management solutions.

Source: Infomart Fiscal 2017 Earnings Presentation

 

Other

The Other segment has several sub-segments brewing, like menu development services, research & promotion services, and expansion of similar B2B platforms in China and Taiwan.

Source: Infomart

 

Infomart’s billing, new vs old offerings

From a high-level view, Infomart is in the business of streamlining business transactions. If you take a look at the fee schedules in each segment, you will see that Infomart’s offerings lean toward monthly fixed fees. The only exception is the Invoicing platform, which takes monthly fees plus transaction fees.

This is interesting because the Invoicing system is the latest of the core platforms (launched 2015). Perhaps this is Infomart’s realization that, while recurring monthly revenues are sticky and highly attractive, the company may be missing out on transaction fees.

Let me explain.

A lot of what Infomart is doing is taking food industry transactions from paper to computer.  When Infomart got its start with order management, it probably valued a stable and recurring monthly fee. This makes revenues predictable and budgeting simple compared to a transaction-based fee structure.However, the monthly fee structure doesn’t fully capture the network effects of a growing install-base for a company that facilitates business transactions.

 

An example

Let’s say food retailer A, B, C, and D all use Infomart’s order management system and work with wholesaler E. It would be benefit food retailer A, B, C, and D for wholesaler E to implement Infomart’s order management system to streamline ordering. For Infomart, this means an extra 30,000 yen ($282) of monthly revenues.

Now, if Infomart billed on a purely transactional basis and wholesaler E installed the ordering system, Infomart just doubled its billable transactions. At least within the small picture of retailer A, B, C, D and wholesaler E.

Perhaps this is overly simplified. After all, double-dipping on transactions probably won’t leave a positive impression on customers. However, there is something to be said about Infomart handling 1.5 trillion yen ($14.1 billion USD) in transactions for fiscal 2017 and generating 6,709 million yen ($63.1 million USD) in revenues. Without double dipping, a 0.5% overall transaction fee would have yielded 7,500 million yen ($70.5 million USD) in revenues.

This isn’t to say that Infomart management made a mistake. There is definitely some hindsight benefit here. Interestingly, the ES segment, which the Invoicing system belongs to, is still running at a loss.

 

Invoicing system and management guidance

In its fiscal 2017 earnings presentation, Infomart lists that there are 168,056 companies using the Invoicing system. Of the 168,056 companies, 2,731 (or 1.6%) are fee paying contracting companies. This segment isn’t limited to the food industry. In fact, the system is already being used by financials, pharmaceutical wholesalers, and online advertisement agencies.

Oddly, the invoicing system, or the ES segment in general, is where management guidance got pretty wild. On February 25th, 2016, Infomart released its fiscal 2016 to 2018 medium term management plan. According to the plan, the ES segment was supposed to generate 2,041 million yen ($19.2 million USD) in revenues and 181 million yen ($1.7 million USD) in operating income. The actuals came in at 1,278 million yen ($11.9 million USD) in revenues and an operating loss of 621 million yen ($5.8 million USD).

At first glance, it appears that management completely botched the plan. From a purely financial standpoint, they did. At the same time, the system itself was on fire. According to the original medium term plan, management was aiming for 3 trillion yen ($28.2 billion USD) in transaction value and 1 million user companies by the end of fiscal 2018.

As of fiscal 2017, transaction value was at 3.1 trillion yen ($29.1 billion USD), but user companies came in hugely short at 168,056 companies. As a result, the medium term plan was adjusted to 5 trillion yen ($47 billion USD) in transaction value and 300,000 user companies by fiscal 2018.

The implications of ES segment billing structure

Infomart management has done well in providing clarity to investors through filings and presentations. Anybody who has looked at the earnings presentations ought to agree. That said, it’s unclear how much revenues were generated through transaction fees versus monthly usage fees.

I’ll provide my estimate, but first, here are my assumptions:

  • The only fee-paying companies are “contracting companies”. The filings don’t clarify whether non-contracting companies pay any amount. Infomart website has an option for companies to obtain free login ID on the products site.
  • Initial fees are AT 100,000 yen (2017) & 50,000 yen (2015, 2016) for Receiving Companies and 300,000 yen (2017) & 150,000 yen (2015, 2016) for Issuing Companies. The filings mention that the fees are FROM 100,000/50,000 yen and 300,000/150,000 yen.
  • Full year revenues generated from monthly system usage fee is based on the average number of contracting companies at the beginning and end of each fiscal year.
  1. Here is a table of the fees for the Invoice and Matching systems:
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  1. Next, we have a table showing the number of contracting companies (Invoice) and Buyer/Seller companies (Matching). Additionally, the table shows the average number of contracting companies and Buyer/Seller companies for each fiscal year.
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  1. Next, we make an approximation of what the Matching system revenues are based on tables 1 & 2 (monthly fees * average number of Buyer/Seller companies * 12 months). Then, we subtract Matching revenues from ES segment total revenues to get an estimate of Invoice revenues:
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  1. Finally, we calculate the initial fees and annual revenues from monthly fees in the Invoice segment for each year. Then, we subtract these amounts from Invoice revenues to get an estimation of transaction revenues.
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Despite doubling the initial fees for Invoice system in 2017, growth continued at a similar pace. Estimated transaction revenues dropped from fiscal 2015 to 2016, then made a minor recovery in 2017. Given the approximate nature of the calculations, this is probably a negligible fluctuation.

Pay attention to invoice issuing companies

Several things to note for the Invoice system:

  • Receiving companies get 50 invoices and Issuing companies get 100 invoices included in the monthly fee.
  • Transaction fees accrue after companies pass the respective limits.
  • Considering that Infomart offers free IDs for Invoice system, there is probably a lower “free” tier before monthly fees come into play.
  • Transaction based revenues for the Receiver companies is an increased amount of monthly fees based on the number of transactions.
  • In contrast, Infomart takes a “pure” transactional approach with the Issuer companies, which charges 40 yen per invoice for 101 to 1,000 invoices and 30 yen for more than 1,000 invoices.

Unfortunately, we are unable to tell how many Issuing companies fall in the 0 to 100, 101 to 1,000, and 1,000+ transaction tiers from Infomart’s reporting. However, Infomart interviews some of its customers, which gives us an inside look. Among its customers are big names like Coca Cola Bottlers Japan (TSE: 2579), Nomura Holdings (TSE: 8604) subsidiary Nomura Securities as well as companies previously mentioned here on Kenkyo like online advertisement company CyberAgent (TSE: 4751) and pachinko machine maker Fields (TSE: 2761).

In Coca Cola Bottlers Japan’s interview (January 2018, 2 months after implementation), the company mentioned that it issues 150,000 invoices per month. Currently, Infomart’s Invoice system is only used in the Tokyo area, which issues about 28,000 invoices per month. Coca Cola Bottlers Japan hopes to roll out the system nationwide. It also commented that if 75% of its invoices became electronic, the company would save over 100 million yen ($940,000 USD) per year.

This tells us two things.

  1. Large scale system implementation is likely done in phases. Even if the number of contracting companies went up year-over-year, transaction fees would only gradually increase.
  2. One full implementation of the Invoice system for a large company generates substantial revenues.

Now, about point 2.

If Coca Cola Bottlers Japan issues 28,000 invoice per month for a full year according to Infomart’s standard fee schedule, the account would generate 10.2 million yen ($96,000 USD) in revenues. This is equivalent to 0.8% of ES segment revenues. Take this to 75% of all 150,000 monthly invoices for a full year and we are looking at 40.6 million yen ($382,000 USD), or 3.18% of ES segment revenues. A full implementation would generate 54.1 million yen ($508,540 USD), or 4.24% of ES segment revenues.

As a comparison, a receiving company processing 150,000 invoices per month for a full year would generate 1.2 million yen ($11,280 USD) per year. This is assuming per use rates are capped at 95,000 yen per month. Infomart does not specify what the rates are for receiving companies processing over 2,000 invoices per month.

Long story short, the billing structure of the Invoice system for Issuing companies has the highest potential for explosive growth.

Where does this leave the ES segment?

A rough and conservative estimate of costs – CoGS & SG&A at 1,000 million yen ($9.4 million USD) each – puts breakeven revenues at 2,000 million yen ($18.8 million USD). In contrast, the ES segment generated 1,278 million yen ($12 million USD) in revenues.

As a reference, management is planning for CoGS at 799 million yen ($7.5 million USD) and SG&A at 1,053 million yen ($9.9 million USD), which would put breakeven revenues at 1,852 million yen ($17.4 million USD).

Either way, the ES segment likely has a good few years to go before breaking even. Currently, Invoice system annual revenues are split almost 50:50 between initial fees and monthly fees. In order to breakeven by fiscal year end 2020, ES segment would have to grow Invoice system at a similar pace, gain the equivalent of five Coca Cola Bottlers Japan customers per year (invoice issuing transaction revenues), and maintain Matching system revenues at or a little bit below current levels. Keep in mind that my math does not take into account the transactional-based fees for invoice receiving systems, which is calculated at a fixed 5,000 yen per month.

 

Valuation…

ES segment breaking even would add 600 million yen ($5.6 million USD), making total operating income about 2,400 million yen ($22.6 million USD). This assumes no growth or decline in other segments.

For the current valuation to be considered fair value, an investor would need to have strong conviction in Infomart’s growth over a 10+ year period. Aside from the ES segment’s invoice issuing system having explosive growth potential, the main growth driving factor would be a change in billing structure across all offerings. More specifically, to incorporate transaction-based billing.

Over a three year period, I’d expect Infomart operating income to come in around 3,500 million yen ($32.9 million USD), primarily driven by continued growth in the Ordering segment and ES segment reaching a breakeven point. For an asset-light company, revenue quality is high (i.e., sticky), primarily because of the service offerings’ importance to the day-to-day operations of customers. With plenty of runway left for growth, I’d put Infomart on the high end of valuation multiples at 13x EV/EBIT.

No matter how we put it, I wouldn’t consider Infomart’s valuation today as anywhere near fair value. At 1,120 yen per share, Infomart trades at a 69.6 EV/EBIT multiple. In three years, if all goes well and Infomart generates 3,500 million yen ($32.9 million USD) in operating income and accumulates 1,500 million yen ($14.1 million USD) in cash each year, Infomart’s fair value would still be around 480 yen per share at 13 times EV/EBIT. Therefore, Infomart is a company to put on a watchlist. I would consider revisiting the company at either 550 yen per share or any announcement of changes in software pricing.

 

The bottom line

Infomart offers B2B platforms which play an important part in its customers’ day-to-day operations. While Infomart likely has a value proposition strong enough to command a change in billing structure, its current valuation is high. Given the company’s recurring nature of revenues and its attractive value proposition for customers, Infomart is worth putting on a watchlist. I will revisit Infomart when share prices come down to 550 yen per share or if the company announces a change in its software pricing.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.