Thinking Points

  • Information Creative (TSE: 4769) is an IT company mainly engaged in the design and development of software as well as system operations and maintenance.
  • With close ties to Hitachi (TSE: 6501) and diverse industry exposure, the company has comfortably weathered through difficult times.
  • Over the last ten years, business performance has improved, and the company has accumulated more than adequate cash on its balance sheet along with its sizeable equity holdings.
  • At today’s 554 yen per share price, Information Creative is both a Magic Formula and a net net stock, trading for negative 2.4 EV/EBIT and 98.6% NCAV on an adjusted basis.
  • If the company maintains current business performance and trades to similar levels as its peers over the next three years, investors can expect a three year investment CAGR of 19.6%.

Introduction

Information Creative (TSE: 4769) is an IT company mainly engaged in the design and development of software as well as system operations and maintenance. More recently, the company has been experimenting with  its own software-as-a-service offering, namely an event ticketing management system. Information Creative reports through a single segment, but it splits revenues into four different categories: Software development, system maintenance and operations, IT services, and other:

Source: Company filings


Since its founding in 1978, Hitachi (TSE: 6501) and its group companies have been major customers. In fiscal 2018, the Hitachi group accounted for 52.1% of total revenues. Over the last decade, Information Creative has been able to keep Hitachi as a stable customer while increasing non-Hitachi revenues.

The business & environment

Information Creative was founded in 1978 by Takao Saito, a former employee of Hitachi. From day one, the company was engaged in maintaining and operating some of Hitachi’s computer systems. Interestingly, Hitachi is not a shareholder of Information Creative. Aside from Takao being a former employee of Hitachi, there isn’t much other information available.

Toru Yamada, the company’s CEO since 2001 and one of the first employees, also doesn’t have much recent exposure. He was interviewed by Shachomeikan (Japanese, unspecified date), where he explained Information Creative’s history, values, business, and career development at a high level.

In short, Information Creative is highly involved with its customers, often having its own system engineers on-site with the customer. The company is also actively engaged in developing project managers, typically conducting training sessions on Fridays and Saturdays.

Interactive Creative’s business is actually quite simple in form. Aside from the relatively new IT Services revenue stream, the company’s revenues have been split in half between software development and system maintenance & operations for more than a decade.

Source: Company filings


As mentioned in the introduction, the bulk of company revenues come from the Hitachi group. While the company hasn’t specifically noted that it is focused on growing non-Hitachi revenues, looking at business performance over the last ten years suggests that this is the case. Hitachi revenue have more or less remained stable while non-Hitachi revenues has consistently grown.

Source: Company filings and author calculations

Information Creative services a wide variety of industries. This has helped the company, particularly through the 2008-2010 downturn where many companies with high financial industry exposure went under. The best part about this is that it is intentional. In a 2014 interview with Japan Interview Press, Toru specifically mentioned servicing a variety of industries in order to reduce the business impact of a downturn in any single industry.

Source: Company presentation


While Information Creative experienced a revenue decline of 16.5% between fiscal 2008 and 2010, the company remained profitable through the downturn. From 2010 on, Information Creative revenues has grown at 4.6% CAGR.

Management guidance

Information Creative set a medium term goal which puts 2019 revenue goals at 8,190 million yen ($75.4 million USD). Interestingly, in its 2018 filings, Information Creative management guided for 8,162 million yen ($75.1 million USD) in revenues and 464 million yen ($4.3 million USD) in operating income for fiscal 2019. This has more or less been the story with Information Creative, however, where management sets realistic targets and either achieves them or gets pretty close.

In the same 2014 Japan Interview Press interview mentioned earlier, Toru also expressed interest in transferring shares from the current Tokyo JASDAQ Standard section to the second section when Information Creative reaches 10,000 million yen ($92 million USD) in revenues. The company has no set target date for this goal.

Shareholders

As of fiscal 2018 (ending September 30th, 2018), Information Creative had 7,732,270 shares issued and 74,502 shares in treasury, putting outstanding shares at 7,657,768.

Here are the major shareholders:

Source: Company filings & Nikkei


Information Creative Saito Ikueikai Foundation belongs to the founder. The CEO also shows up as a major shareholder. Interestingly, Hitachi has no equity stake in Information Creative.

The company offers to equity compensation.

Financials & Valuation

  • Information Creative is asset light and more than healthy with a 0.65 equity to asset ratio and a diversified customer industry base.
  • 45.4% of company assets are in the form of cash. Fixed assets are negligible, and 2,045 million yen ($18.8 million USD) of other long-term assets is in equities.
  • Interestingly, at today’s 554 yen per share, the company trades for an adjusted 98.6% NCAV and a negative 2.1 EV/EBIT.

Though Information Creative’s dividend payout ratio has consistently been well above 30% over the last 9 years, the company can stand to offload even more cash. During the same period, the company hasn’t repurchased any shares. With that said, its cash position mostly grew in the last five years:

Source: Company filings and author calculation


What’s more, Information Creative has 2,045 million yen ($18.8 million USD) invested in equities under other long term assets.

It’s probably fair to say that either Information Creative management will start repurchasing shares, invest (i.e., M&A), or doesn’t quite understand how capital allocation works. The biggest risk here is bad M&A. Given management has been focused on improving business performance, not understanding capital allocation is likely not a major risk factor.

At today’s 554 yen per share price, Information Creative trades at 2.4x EV/EBIT. Adjusted for its shareholdings, the company is actually a net net stock trading for 98.6% NCAV and negative 2.1 EV/EBIT.

Meanwhile, similar sized software development/system operating companies like Pacific Systems (TSE: 3847), Himacs (TSE: 4299), and bBreak Systems (TSE: 3986) trade between 2.8x and 7x EV/EBIT. Adjusting Himacs’ EV/EBIT for its long term deposit of 1,100 million yen ($10.1 million USD) still puts EV/EBIT at 2.4x. The other two don’t have a meaningful amount of long term cash equivalent assets.

Conservatively, if Information Creative maintained its current business performance and traded to 2x EV/EBIT over the next three years, investors can expect a three year investment CAGR of around 19.6%. Investors are protected by Information Creative’s stable business (i.e., Hitachi group) and more than healthy cash position.

The bottom line

Information Creative is a software developer and a system operator with a long history. From the beginning, the company has catered to the Hitachi group, and has managed to keep its industry exposure diverse. Over the last decade, the company’s business performance has continuously improved, resulting in a more than adequately capitalized balance sheet. At today’s 554 yen per share price, investors can expect to safely gain a three year investment CAGR of 19.6%.


Kenkyo Investing
Kenkyo Investing

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