Thinking Points

  • Unirita (TSE: 3800) is a top 10 Magic Formula stock in small cap Japan.
  • The company is a bit difficult to understand, mainly because it consists of various different smaller companies and a long list of business partners.
  • Overall, historical business performance has been great, and patient investors can expect a three year investment CAGR of between 3.2% and 9.6%

Unirita (TSE: 3800) is an established software development company with strengths in mainframe systems and packaged enterprise software. The company is actually a group of many smaller IT companies, each with its own “personality”. The Unirita group in its current form came into existence in 2015.

If the company sounds familiar, that’s probably because I’ve mentioned it here before. In fact, Fisco published a report about it not long ago. And Unirita is partnered with Data Applications (TSE: 3848) as well, which I wrote about last week (you can see the Unirita logo on the list of partners in the post).

 

Unirita’s Business

Unirita offers a decent English corporate page. From the sound of it, the Unirita group is an expert in all things IT related. The more appropriate interpretation is that the group consists of a series of smaller companies and partnered companies, each specializing in a certain area. Combined, these companies offer a wide variety of IT solutions to a wide variety of industries.

Source: Unirita Mid-term management plan, modifications and English added by author

 

The company operates through four segments:

Product – Open system software package development and sales. Many of Unirita’s offerings revolve around real-time data analysis/utilization tools and enterprise system operations software.

Mainframe – Mainframes are the opposite of open systems. The company develops and supports enterprise systems for clients primarily in the financial, insurance, and manufacturing industries.

Cloud – Cloud software offerings, mainly revolving around data utilization, system operations, workflow management, and back office support.

Solutions – The Solutions segment mainly consists of work performed around the Cloud and Product segments. These are things like data management consulting, support work through system transitions, installation and training on Unirita software, etc.

System Integration – the newest segment added after acquiring Mugen in February 2018. This segment isn’t reflected on full year financials yet. Mainly consists of building and integrating customer relationship management, e-commerce, and content management information systems mainly for telecom, retail, distribution, and manufacturing clients.

 

Source: Filings, chart created by author

 

Again, System Integration is a brand new segment and not included in full-year financials yet. Management is expecting a revenue contribution of 1,550 million yen ($13.9 million USD) for fiscal 2019. There was no mention about contribution to operating income.

 

The future

Directionally speaking, Unirita is milking the high margin Mainframe cashcow and investing in its Cloud and Product businesses. The focus is on recurring, scalable revenues which accounted for 3,805 million yen ($34.2 million USD) in fiscal 2018 revenues. This was 53.9% of total fiscal 2018 revenues, and 195 million yen ($1.8 million USD) shy of company target of 4,000 million yen ($36 million USD).

As a part of the new medium term management plan (~ fiscal 2021), Unirita aims to increase its recurring revenues to 5,500 million yen ($49.4 million USD) by fiscal 2021. This would put recurring revenues at 49% of total after accounting for the new system integration business. In total, the plan is to increase top line CAGR at 16% and operating income CAGR at 14.1% over 3 years.

One thing to note here is that Unirita’s group structure will likely remain the same in the near future. An interview (Japanese) with Unirita chairman Hiroki Takefuji highlights this. In the interview, Hiroki specifically mentioned that each member company is intentionally small. According to him, small companies lack capital and influence, so people start getting creative to survive. This offers a platform for people to try new things and come up with a unique offering. In other words, Hiroki promotes variation and individuality by keeping companies small.

 

Financials & business performance

 

  • Sky high Greenblatt ROIC – Consistently above 1,000%. Lowest point was 790% back in fiscal 2009.
  • Healthy net cash – Net cash of 4,629 million yen ($41.6 million USD). Fiscal 2018 total revenues was 7,057 million yen ($63.4 million USD). Market cap is currently at 15,323 million yen ($137.7 million USD), which means net cash is 30% of market cap.
  • Free cash flow – Consistently generates free cash flow. No major swings in capex either.

 

Valuation

Unirita as a group is incredibly difficult to understand, even as a native Japanese speaker. Catalyst seeking investors may want to approach Unirita with caution. With that said, it’s good to know that the series-of-small-companies approach is intentional. Given Unirita’s consistently healthy business performance and lucrative mainframe segment, it’s difficult to imagine the company blowing up (in a bad way).

In last week’s post, I mentioned several IT companies similar to Unirita in size. These companies trade between 5 and 13 EV/EBIT. Unirita currently trades at 3.9 times EV/EBIT. The company is probably worth at least 5 times EV/EBIT in its current state with the optionality for a big win if one of the subsidiaries takes off.

With continued business performance and a multiple expansion to 5 times EV/EBIT playing out over 3 years, investment CAGR comes out to 3.2%. With business performance in line with management’s medium term plan and a multiple expansion to 5 times EV/EBIT playing out over 3 years, investment CAGR comes out to 9.6%.

 

The bottom line

Unirita consists of many smaller subsidiaries and business partners, which is intentional. As a whole, the company is difficult to understand. Overall, however, business performance has been healthy historically and there’s no reason to believe that’s changing anytime soon. The stock ought to deliver investment CAGR between 3.2% and 9.6% over the next three years. Catalyst seeking investors ought to approach the stock with cautious optimism and patience.

 


Kenkyo Investing
Kenkyo Investing

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