Thinking Points

  • Fisco introduced 4 company reports last week.
  • All 4 companies are involved in cloud services in some way, presenting a nice opportunity to learn about Japanese cloud-based services.
  • Additionally, I missed one company from the last Fisco Roundup, so you get one extra company to read about!

Fisco Roundup

If you like cloud service companies and Japan, you’re reading the right article. For the week ending June 15, 2018, Fisco published 4 reports, all on companies that offer cloud-based services in some form. Additionally, I missed one company in the last Fisco Roudup, so you have an extra report to read. Get your coffee ready!


TerraSky (TSE: 3915)

When you think TerraSky, think Japanese Salesforce, quite literally. TerraSky has a licensing agreement with Salesforce and its main business is in cloud integration services, primarily using the Salesforce platform (and secondarily using Amazon Web Services platform [AWS]).

In addition to offering cloud integration services, TerraSky develops tools like SkyVisualEditor, a drag and drop user interface customization tool for Salesforce. In terms of business development, what I thought was particularly interesting was this snippet from Fisco’s report:

“Because there are few Japanese companies located in rural areas that have moved their internal systems to the cloud and also very few who have made the move among small to medium sized companies, TerraSky strategically established subsidiaries like Cloudia Japan in Kyushu and Kitalive in Hokkaido to target this demand.”

TerraSky revenues and operating income has grown at a 34.7% and 206% 5-year CAGR respectively (basically went from operating loss to profit in 5 years). Today, the company has a market cap of 18,910 million yen ($171 million USD), a trailing-twelve-month (TTM) EV/EBIT of 64, and an equity-asset ratio of 0.39. At first glance, this seems like a high valuation for what looks to me like a company with mostly project-based revenues. If you’re familiar with cloud services integration, I’d be curious to hear your thoughts!

Click here for Fisco’s full-report on TerraSky


USEN-NEXT Holdings (TSE: 9418)

USEN-NEXT Holdings is probably the most confusing business to look at this week. Contributing factors to this confusion include: Change in fiscal period, tender-offer/”re-merger” of USEN, and its various lines of businesses.

Here’s my attempt at making things simple by covering brief commentary on key subsidiaries. USEN broadcasts music (like a mini Pandora-Sirius XM mashup), U-NEXT streams videos on demand (like a mini Netflix), and ALMEX develops a bunch of business systems. Collectively, these companies are managed under the increasingly popular holding structure. This is what we are referring to as USEN-NEXT Holdings.

Current market cap is at 69,426 million yen ($628 million USD). Trailing-twelve-month metrics are currently useless/hard-to-calculate quickly, mostly because of the one-two combo of TOB + fiscal period change. If you like special situation type investment opportunities, you’re probably looking in the right direction here.

Click here for Fisco’s full-report on USEN-NEXT Holdings.


Aeria (TSE: 3758)

Aeria started out as an IT services and games company. Recently, however, it also started diving into real estate asset management. Today, the company operates through three segments: Contents, IT Services, and Asset Management.

The Contents segment is the bread and butter of the company, accounting for 56% of fiscal 2017 revenues. This segment mostly consists of smart phone game sales. IT services segment accounted for 29% of 2017 revenues and covers a wide variety of services including: business cloud services, managed hosting services, ISP services, affiliate advertising program platform, MVNO cell phone services (low cost carrier like Cricket Wireless for AT&T). The Asset Management segment accounted for 15% of 2017 revenues and is mostly engaged in the business of real estate investment and management. Most notably, Aeria’s subsidiary Twist is an operations agent of Airbnb. In case you haven’t gotten the news, Airbnb is going through some serious pressure in Japan at the moment.

To be frank, Aeria is another business that is near impossible to analyze, with various, seemingly unrelated business segments and a collection of subsidiaries. The company has a market cap of 29,676 million yen ($268 million USD), an EV/EBIT of 9.3, and a equity-asset ratio of 0.5. It’s worth noting that the company recorded operating losses in 7 out of the last 10 fiscal periods.

Click here for Fisco’s full-report on Aeria


Just Planning (TSE: 4287)

Just Planning operates through 5 business segments: ASP Business (i.e., old way of saying “Software as a service” or SaaS), System Solution, Logistics Solution, Solar Power, and Other. The core segments are the ASP Business and Logsitics Solution segments. Combined, the segments accounted for 86.2% of fiscal 2018 sales and 86.6% of gross profit.

The ASP Business offers its flagship Makasete Net software, which is a restaurant management software primarily catering to medium-sized restaurant chains with under 50 stores. The System Solution segment goes over to the Makasete Net subscribers and sells hardware, configures systems, and performs maintenance. Then the Logistics Solution segment takes the business outside of the restaurant locations, providing warehouse/investory, merchandising, and logistics management services. And then we have the Solar Power and Other segments that sort of do its own thing.

Frankly, Just Planning is the sort of business a lot of value investors would be attracted to, except that its price skyrocketed in the last 4 months:

Source: Google

The company has a recurring revenue model, huge cash position (and no debt), low working capital requirements, mostly free cash flow positive, share buybacks, & dividend payouts, etc. Until recently, this company traded at low single-digit EV/EBIT multiples. Then stock price shot up 4 times over and now its at 40 times EV/EBIT. I’m not exactly sure what the reason behind the spike is, but if I had to guess, it’s probably got to do with the new Putmenu business. More on this in page 2 of the report.

Just as an FYI, many Japanese businesses refer to SaaS as ASP. Also, you’ll frequently see “stock-type” and “flow-type” business models in Japanese business lingo. Stock-type refers to recurring revenue model and flow-type refers to project-based revenue models. You’ll see the term “stock-type business” in this Fisco report.

Click here for Fisco’s full-report on Just Planning


Tokai Holdings (TSE: 3167)

I somehow missed Tokai Holdings in my last Fisco Roundup. This is another company with its hands deep into several, seemingly unrelated businesses. Tokai Holdings aims to be the “Total Life Concierge”, offering a complete range of services for everyday life. It’s not immediately clear what this means, but looking at the business segments help.

Tokai Holdings operates 6 business segments: Gas/Petroleum, Information/Communications, CATV, Building/Real Estate, Aqua, and Other.

The Gas/Petroleum business mostly consists of LP gas sales. Tokai is one of the bigger players in a highly fragmented LP gas business, holding a 3% domestic market share. In the Information/Communications segment, Tokai basically rents optical lines and mobile networks to offer internet and low-cost mobile phone services as an MVNO. The CATV segment offers broadcasting and communication services. In the Building/Real Estate segment, the company designs, builds, renovates, buys, sells, and manages both residential and commercial properties. The Aqua segment engages in bottled water delivery.

The Gas/Petroleum and Information/Communications segment make up for 68.3% of fiscal 2018 revenues, but figuring out how to assess the various business segments would require a deeper dive. I’m not sure what to make of the 18.6 EV/EBIT or the 0.35 equity-asset ratio.

Click here for Fisco’s full-report on Tokai Holdings.


Wrap Up

Personally, I think Just Planning is the most interesting company out of the group. This is the sort of company I wish I would’ve researched before the market got excited. In fact, I had read about the company several times while researching related companies, like Infomart (TSE: 2492, Premium Article). That said, there are still companies positioned similarly in other industries with more reasonable valuations, like EM Systems (TSE: 4820), which I wrote up on Focused Compounding (paid content). In any case, I hope you enjoyed this week’s Fisco Roundup!

To stay on top of Fisco’s reports, you can either check up on Fisco’s website or follow them on Twitter.


Author: Kenkyo Investing

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