Thinking Points

  • Eurasia Travel (TSE: 9376) is a travel service provider which showed up in the top spot on a small cap Japan Magic Formula screen this week.
  • The company has attractive qualities, like its asset light nature and non-existant working capital requirements. However, some data sources miscategorize an operating expense line item on the income statement, which easily knocks the company out of contention as a top Magic Formula stock.
  • Overall, the company seems to be struggling through Japan’s strong outbound tourism trend. Given this, Eurasia Travel would look considerably more interesting at NCAV, which is 391 yen per share vs. the current share price of 579 yen.

 

Eurasia Travel (TSE: 9376) is a travel service provider specializing in guided small international group tours. We’re going over this company because it showed up in the number one spot on a small cap Japan Magic Formula screen this week.

The company targets socially mature Japanese people who are seeking spiritual satisfaction. In other words, people who have worked their way up Maslow’s hierarchy of needs. This generally translates into a 50+ year old customer base and specialized tours of places that aren’t typically mainstream (like rural Europe).

The company offers tours to over 160 different countries:

Source: Company presentation (English added by author)

 

Operating Business

Eurasia Travel does not disclose a whole lot of information in its earnings presentations, but its filings contain a lot. More interestingly, the company website’s philosophy section spans 8 pages and its corporate values section is four pages long. Presumably, this is influenced by 61 year old founder-CEO-chairman Toshio Inoue, who also owns 52.8% of the company.

The company’s philosophy and values operationally translates into the following characteristics:

  • Target “socially mature” customer base of about 60,000 people.
  • Specialized tours of lesser known places.
  • Small group tours of 10 to 25 people.
  • Tour length of 10 to 15 days.
  • No tour package sales through third party agencies.
  • No organized visits to duty free or souvenir shops.

Needless to say, the company is rather focused on a providing a niche offering to a niche target audience. To give you an idea of the tours actually offered, here are a few:

Source: Company site

 

It seems natural to assume that Eurasia Travel’s target customer base ought to expand as the Japanese population ages. However, this assumption is either not true or the company hasn’t been able to convert customers well. Despite near-record-level Japanese outbound tourism over the last few years, Eurasia Travel sales hasn’t fared as well as it did a decade ago.

Source: Eurasia filings and Japan Tourism Agency

For fiscal 2018, it’s looking like the company will be able to break the 10,000 mark again, but it’s a close call.

 

Financials

Fortunately, the company’s been able to more or less maintain its gross profitability, which has fluctuated between 14 and 23%, but generally remains around 19%. Interestingly, operating income is miscalculated on some financial sites.  

Upon closer inspection, I’ve discovered that “other expenses” which is listed under operating expenses on the income statement is miscategorized as one-time expenses. This materially affects both the Earnings Yield and Return on Capital calculation used for the Magic Formula screen.

Depending on your data source, trailing twelve month operating income might be shown as 256 million yen ($2.3 million USD). The correct figure will be closer to 11 million yen (100,000 USD).

Instead of an Earnings Yield of 100+%, the corrected figure comes in around 5%. Greenblatt ROC is still at a solid 268%, mostly due to the fact that Eurasia Travel only has 4 million yen ($36,000 USD) in net fixed assets and negative working capital. This miscalculation easily knocks the company right off the top spot in the small cap Japan Magic Formula screen.

After correcting for the miscalculation, operating margins are razor thin currently, and the company’s been in a tough place operationally for the last five years. The balance sheet is debt free with a net cash position of 951 million yen ($8.6 million USD), or 44.5% of its current market cap of 2,137 million yen ($19.3 million USD).

Now, the most interesting part about Eurasia Travel is its near zero net fixed assets with negative working capital. The negative working capital happens because these group tours are paid for in advance. The company would be a free cash flow machine if it could figure out the profitability problem. For fiscal 2018, the company is projecting 45 million yen ($410k USD) in operating income, or less than 1% operating margins.

 

Napkin Valuation

Eurasia Travel can quickly become a cash flow machine if it figures out the profitability problem, thanks to its negative working capital. The niche focus, however, makes it difficult to imagine any sort of real growth scenario beyond where the company was 10 years ago (16,359 customers vs. 9,841 today).

What’s most worrisome is the company’s inability to consistently turn a profit through strong outbound travel trends and strong economic performance in Japan. This makes valuation considerably difficult.

The company can be treading along +/- 1% operating margins forever, witness a surge in customers, or go through a slow decline that eats away everything it ever earned. There is no indication that the company will change in a material way anytime soon.

Normally, I wouldn’t bother coming up with a figure for this level of uncertainty. But if I had to, I’d be much more interested in the stock if it were trading at NCAV. This would put the share price at 391 yen vs today’s 579 yen.

 

The bottom line

Eurasia Travel has some attractive qualities, like its asset-light nature and non-existant working capital requirements. With that said, the company is having a difficult time figuring out how to turn a profit despite Japan’s recent strong outbound travel trends. The niche nature of the company’s group tours makes it hard to imagine a growth case of real significance. Hence, we’ll just say the company would look considerably more interesting as an investment at NCAV, which is currently at 391 yen per share vs. the current price of 579 yen.


Kenkyo Investing
Kenkyo Investing

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