Thinking Points

  • Being (TSE: 4734) develops and sells civil construction estimation and specialized CAD software.
  • Operating performance fluctuates highly, with management providing guidance far off from actuals. That said, there are some good characteristics like collecting 5 years of service revenues upfront for software leases.
  • The company appears cheap initially. After adjusting for deferred revenues, however, Being appears fairly valued at 6.2x EV/EBIT in comparison to other companies developing similar software.
  • Being will be more interesting if share prices fell back down to the 400 – 500 yen per share range, where it was in June 2018. Today, shares trade at ~640 yen.

Introduction

Being (TSE: 4734) primarily develops high-end civil construction estimation package software for use by large and mid-tier Japanese general contractors. Additionally, the company offers electrical and water computer aided design (CAD) package software geared toward small and mid sized businesses through subsidiary plus x plus.

For fiscal 2018, revenues were distributed as follows:

Source: Fiscal 2018 earnings presentation

 

After peaking out in 1992, Japanese construction slowly declined through to 2010. Though the industry has seen a resurgence over the last few years, Being management is projecting growth from CAD software and consulting.

 

The business & environment

Japanese construction investment peaked in 1992 at 84 trillion yen ($751 billion USD) and steadily declined through 2010 down to 41.9 trillion yen ($375 billion USD). More recently, construction investment has been on the rise, growing back to 56 trillion yen ($501 billion USD) in 2017.

The construction industry in Japan, one of the least automated industries, is heavily affected by the nation’s aging population, with 34.1% of the workforce above the age of 55 (vs. 29.7% for all industry average) in 2017.

In order to address these issues, the Japanese government initiated the i-Construction Consortium (2016), which pushes for a deeper level of IT utilization and productivity improvements in construction. This push includes things like:

  • Productivity-focused design
  • Site assembly of factory produced material (like precast concrete)
  • Simplification, standardization, and increased efficiency of construction site tasks.
  • Automation & mechanization (utilizing automatic transport system, remote control construction machinery, etc)
  • Utilization of Construction/Building Information Modelling

 

Civil construction estimation software

We have a Japanese construction industry facing some headwinds, but pushing for incorporation of the sort of products that Being develops. The company considers its civil construction estimation software as a stable business in a developed market with little prospect for material growth (pg. 6 of fiscal 2018 presentation).

Unfortunately, there is little information regarding market share, pricing, or number of software licenses sold. The company does, however, promote the fact that its core Gaia civil construction estimation software was the top share brand in a 2007 report by the Economic Research Association (Japanese).

One blog specializing in construction estimation software (Japanese) presented Gaia as the high-end (and expensive) estimation software in a 2015 post. Two other notable competitors include:

Both CST and Kibi System are private. Neither company exclusively develops and sells civil construction estimation software, but generally offer construction related software competing with Being.

Kibi System recorded 899 million yen ($8 million USD) in revenues and 33 million yen ($290K USD) in operating income for fiscal 2018 (Japanese). No financials available for CST.

A key point to note here is that the intended use for Gaia is for estimation on government related civil engineering and construction projects. Hence, a slowdown in government funded projects would negatively affect software sales.

The Construction Information Communication Technology (ICT) segment accounted for 68.5% of total revenues in fiscal 2018. Management considers this a stable segment with little prospects for material growth.

 

CAD Software

Through its subsidiary, plus x plus, Being offers several variations of specialized CAD software, primarily in electrical and water related CAD. This software is primarily geared for small businesses. Like Being’s construction estimation software, there is no real information on market share, pricing, or licenses sold.

There are, however, several publicly traded companies that also develop specialized CAD software:

  • Fukui Computer Holdings (TSE: 9790)
  • Zuken (TSE: 6947)
  • C&G Systems (TSE: 6633)
  • Andor (TSE: 4640)

CAD software accounted for 26.4% of total revenues in fiscal 2018. Management considers this segment a high growth area.

 

Overall

Being is slowly moving from a civil construction estimation software company to a general construction related software company. There isn’t a lot of information available on the company, but management sees the Construction ICT segment as the stable low-growth business and CAD software as a high growth area. In addition to these two segments, the company is testing the waters with consulting, which currently accounts for about 5% of annual revenues.

Source: historical filings

 

Source: historical filings

 

There isn’t a lot of information on the management team either. Founder and board chairman Yoshishige Tsuda passed the CEO role onto Masahiro Suehiro in April 2011. I found one interview of Masahiro published in October 2011, not long after he assumed the role of CEO.

Yoshishige was Masahiro’s customer back when Masahiro used to work as a salesperson for a clothing store. Masahiro started working for Being in 1988, back when the company had 6 employees (including him). He is very much a salesperson, mentioning that sales is the heart of the company. Still, he enjoys building computers and playing with new technology in his free time.

What’s interesting about the management guidance at Being is that they miss targets half of the time. This is unusual for a Japanese company, normally known to be overly conservative on estimates.

Here’s a brief history of guidance couple with actuals performance:

Source: historical filings

 

In Being’s case, it seems though management does not have a good feel for how the business will perform.

For fiscal 2019, Being is guiding for 5,600 million yen ($49.9 million USD) in revenues and 450 million yen ($4 million USD) in operating income. These are revised figures from October 2018, guidance was lower originally.

For the mid term plan, the company was originally projecting 7,000 million yen ($62.3 million USD) in revenues and 1,000 million yen ($8.9 million USD) in operating income by fiscal 2020 year end. This has been adjusted to 6,000 million yen ($53.5 million USD) in revenues and 300 million yen ($2.7 million USD) in operating income by fiscal 2021 year end. Management plans to invest heavily in new product development.

 

Shareholders

As of fiscal 2018 year end (March 31, 2018), Being had 8,257,600 issued shares and 431,159 treasury shares, putting outstanding shares at 7,826,441 shares.

The top 10 shareholders for the company are:

Source: Nikkei & company filings

 

The Tsuda family has a controlling interest in the company. There have been no recent filings submitted to the Financial Services Agency showing any purchases or sales of company stock.

CEO Masahiro Suehiro owns 24,000 shares. As of October 30th, 2018 closing, share price was 615 yen. Masahiro’s stake currently amounts to 14,760,000 yen ($132K USD).

The company does not have an equity compensation plan.

 

Financials & valuation

Several key points to note in thinking about Being’s financials and valuation:

  • Low operating margin (~7%) in comparison to other companies developing similar software (9~35%). Target is 15%.
  • Recent R&D expenditure at record levels – 273 million yen ($2.4 million USD) in fiscal 2018 vs. 10-year average of 86.3 million yen ($770K USD) – primarily for core Gaia 10 product development, released in late 2017.
  • 2,270 million yen ($20.2 million USD), or 62% of liabilities is deferred revenues (前受収益 in current liabilities and 長期前受収益 in long term liabilities). This is because Being collects 5 to 6 years of maintenance and service fees upfront for software leases.
  • Cash should be adjusted for deferred revenues. Adjusted EV/EBIT using trailing twelve month EBIT is at 4.6x and full-year EBIT is at 8.7x. Using fiscal 2019 guidance (revised October 2018), EV/EBIT is at 6.2x.

 

Given management’s expectations on a low-growth core business and Being’s small business scale, the current valuation of 4~9 EV/EBIT is probably about right. Growth in CAD or consulting gaining traction may drive an increase in operating income. That said, management is clear about continuing heavy R&D and already adjusted expectations in mid term plans for a lower 300 million yen ($2.7 million USD) operating income by fiscal 2021 year end.

For reference, here are the scale (millions of yen) and unadjusted multiples for the CAD developers listed earlier, and adjusted multiples for Being:

 

The bottom line

Being is a healthy software company that looks like a bargain, but actually trading for reasonable valuations once adjusting for deferred revenues. Its core business, civil construction estimation software, is highly affected by government spending, and is expected to be a low growth segment by management. With that said, specialized facilities CAD software is categorized as a high growth area (though no details are discussed). The company currently trades for 641 yen per share. Investors ought to keep an eye on Being to see if valuations come back down to the 400 yen per share level, where it was until June 2018.

 


Kenkyo Investing
Kenkyo Investing

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