Thinking Points

  • Asmo (TSE: 2654) primarily provides prepared meals to nursing homes. Additionally, the company operates nursing homes and restaurants, runs a food trading/wholesale operation, and has miscellaneous other businesses.
  • After purchasing a struggling hotel in 2006, debt-laden Asmo was in shambles. The situation was exacerbated when a former CEO embezzled company funds, putting the company into negative equity in 2010.
  • Best Life, Asmo’s largest customer and shareholder, came in to help. And Asmo has since turned around its business, maintaining a healthy operating business and balance sheet.
  • However, there is more than meets the eye with Asmo, as Best Life’s founding family effectively owns a 77% stake in the company and has a dubious track record – including a run-in with the National Tax Agency and possible involvement with the Japanese underworld.
  • Although recent company financials look fairly attractive and appears to have solid growth ahead, investors are best advised to steer clear of Asmo.

Introduction

Asmo (TSE: 2654) primarily provides prepared meals to nursing homes. Additionally, the company operates nursing homes and restaurants, runs a food trading/wholesale operation, and has miscellaneous other businesses. Asmo reports through six segments: Asmo (group management, property rental), Asmo Trading, Asmo Foodservice, Asmo Nursing Service, Asmo Catering (mainly overseas restaurants), and Other:

Source: Company filings


Eight years ago, Asmo was on the verge of bankruptcy after a former CEO supposedly embezzled company funds intended for a loan payment on a hotel Asmo used to operate. The company was saved by its biggest customer, but there is more to the story, which we will cover later. In short, Asmo has so far been the messiest company we’ve covered. While interesting, it is probably best for investors steer clear of Asmo. Today’s write-up will mainly focus on Asmo’s operating business and its complex family involvement while forgoing valuation as there are more than a few issues raising red flags.

The business & environment

To start things off, it is best to describe Asmo’s messiness as simply as is possible. In short, the largest shareholder, Best Life, is also the largest customer and effectively the largest supplier to Asmo.

Best Life is the second largest nursing home operator in Japan with 163 facilities (Japanese). At one point, the company accounted for 57.4% of Asmo revenues (2012). In recent years, however, Best Life has accounted for around ~30% of revenues.

If we look at Asmo’s major shareholder list, a company called Persons Bridge comes up as the largest shareholder, with a 58.5% stake. The head of this company is Hiro Nagai. While recent Asmo filings don’t make the connection, the 2012 filing shows that Best Life owned 50% of Persons Bridge. Additionally, Best Life holds a 10.9% stake in Asmo, and the founder of Best Life, Hiromi Nagai, holds a 7.7% stake. Collectively, the Nagai family owns 77.1% of Asmo shares.

What’s particularly interesting is the fact that the head of Best Life is Riki Nagai, brother of Asmo CEO Takeru Nagai. Presumably, Hiromi Nagai, founder of Best Life, is the father of both. When looking at Asmo’s last ten years, it used to mainly be a food wholesaler and hotel/restaurant operator. The way Asmo got into the prepared meal business was through carving out Persons Bridge’s prepared meal operation and transferring it to Asmo in exchange for 95,000,000 Asmo shares in 2008.

Asmo’s largest supplier, Gift Corporation, has historically accounted for 20~30% of Asmo’s purchasing spend. Until fiscal 2017, Gift was a wholly owned subsidiary of Persons Bridge. The fiscal 2018 filings, however, noted that Persons Bridge sold its Gift shares off, without specifying to whom. At the very least, it seems Asmo filings are increasingly becoming opaque, and it wouldn’t be particularly surprising if Gift is now owned by a different Nagai family member/business.

Near bankruptcy

With this context, it shouldn’t come as a surprise that Best Life stepped in to save Asmo when it was on the verge of bankruptcy in 2010. The story behind this stems back to 2006, when the company acquired struggling Dojima Hotel. At this point, Asmo was already debt-laden with 2007 equity to asset ratio at 0.02.

In July 2009, Resona Bank (TSE: 8308) sued Asmo on delinquency and requested the company to surrender the hotel (Japanese). Soon, news about the former CEO embezzling the money intended for payment hit the headlines. By fiscal 2010 year end, Asmo had negative equity. Best Life and Persons Bridge, which had given the company short term loans, forgave the debt, enabling Asmo to maintain its status as a publicly listed company and avoiding bankruptcy.

Operating businesses

Source: Company filings


Source: Company filings


Admittedly, the charts above look a little messy. Several key notes – the 2009 to 2010 drop in Asmo Trading revenues is largely due to unloading three subsidiaries. The 2010 to 2011 drop in Asmo Catering revenues is largely due to unloading its hotel operations. This segment used to be called “Hotel and restaurants” until 2011.

The key revenue and operating income generating segments are Foodservice and Nursing Services. Presumably, the bulk of Foodservice revenues come from Best Life:

Source: Company filings


Asmo filings note that Best Life revenues are generated through the Asmo, Asmo Foodservice, Asmo Nursing Services, and Other segments.

As for the steadily increasing Nursing revenues, Asmo started by acting as an intermediary between Best Life and families looking for elderly care services in 2012. Then in 2013, the company started offering home care and support services. Today, Asmo operates six nursing care facilities along with 37 home care service offices and 13 home care support service offices.

The more interesting recent development is its insurance business, which falls under the Other segment. In 2012 and 2013, Asmo acquired a couple insurance companies and started offering life insurance policies to its pre existing customers.

Under normal circumstances, the development of Asmo’s business lines since its near-bankruptcy experience in 2010 – particularly the nursing segment – would be a mouthwatering turnaround success. With that said, there is considerable reason for investors to remain cautious about Asmo.

Ties to the Japanese underworld

Best Life, and more specifically its founder Hiromi Nagai, has a questionable track record. In 2010, the National Tax Agency’s Tokyo Office pointed out that Best Life had concealed income (Japanese) to the tune of 1,000 million yen (~$9 million USD). More specifically, Hiromi had taken major losses in the stock market, but had Best Life report as if the company was the one involved in the transactions, thereby reducing corporate profits.

In his own publication, Access Journal (Japanese), freelance journalist Shunsuke Yamaoka notes that Hiromi was invested in Advanced Systems and Technology Co (ADTX), Toho Global Associates, Maruishi Cycle, and Vertex Link. All of these companies were involved in scandals of some sort, with the first two being affiliated with the underworld. The most deeply ingrained company was ADTX, which had a former Yamaguchi-gumi boss on as an executive.

To be sure, the credibility of Shunsuke Yamaoka is up in the air. But reporting on the income concealment came through just about every major publication. And it appears Sankei Newspaper also noted Hiromi’s investment in ADTX, though the link to the original article has since expired (Japanese). What all this means is that, at the very least, Hiromi concealed company income, and possibly even has involvement with the underworld.

Shareholders

As of Q2 2019 (ending September 30th, 2018), Asmo had 15,145,175 shares issued and 1,124,420 shares in treasury, putting outstanding shares at 14,020,755.

The major shareholders are:

Source: Company filings & Nikkei


Since we already discussed Persons Bridge, Best Life, and Hiromi Nagai earlier, no further discussion is necessary here. Asmo offers no equity compensation.

Financials

  • Asmo’s business operations and finances went from losses and negative equity (2010) to profitable and 0.64 equity to asset ratio in 8 short years.
  • Much of this was due to the help of Best Life, Asmo’s largest shareholder, customer, and until recently, largest supplier.
  • On the surface, Asmo appears to be a successful turnaround. Upon taking a closer look, however, there is considerable doubt regarding interest-alignment between controlling shareholder Nagai family and minority shareholders.
  • Hiromi Nagai, founder of Best Life, had run-ins with the National Tax Agency, with the possibility of involvement in the Japanese underworld.
  • Investors ought to steer clear of Asmo as the controlling family has a dubious track record. No valuation.

The bottom line

While Asmo looks like a turnaround success on the surface, there is considerable reason to believe that the Nagai family’s interests may not be aligned with minority shareholders. Moreover, close to a third of company revenues is generated from Nagai family controlled Best Life, the indirect majority shareholder with a 77% stake. Investors ought to steer clear of Asmo. Frankly, it’s strange that this company is listed.


Kenkyo Investing
Kenkyo Investing

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