Thinking Points

  • IFIS Japan (TSE: 7833) is a financial information vendor providing investment information, investor relations, and documentation services to brokerage firms, insurance companies, investment funds, and publicly listed companies.  
  • The company started out as an outsourced document printing and delivery business for financial institutions 24 years ago, then successfully transformed into the online platform it is today.
  • Although the company has delivered record level performance over the last four years, it’s important to keep in mind that business performance is susceptible to the swings of the market. Business performance declined considerably during the global financial crisis.
  • More recently, however, the company is increasingly focusing on its non-financial e-commerce offering, which accounts for 5.1% of revenues today.
  • At 570 yen per share, the company currently trades at 3.1x EV/EBIT with an equity to asset ratio of 0.81. With business performance still largely susceptible to market swings, it’s appropriate to say IFIS trades at fair value today considering a more “normalized” environment.

Introduction

IFIS Japan (TSE: 7833) is a financial information vendor providing investment information, investor relations, and documentation services to brokerage firms, insurance companies, investment funds, and publicly listed companies. The company operates through five segments:

Source: Company filings


Since its founding in 1995, the company has mainly focused on financial services. More recently, however, IFIS started venturing into the e-commerce scene as well. The impact of this is still non-material, but it is the first non-financial industry that IFIS expanded into.

The business & environment

IFIS got its start in 1995 by collecting research reports from brokerage firms, making copies, enclosing them in envelopes, and delivering them to the end user. Then, the company started providing documentation services for investment funds, insurance companies, and banks. Today, this work (and more) are split into four segments.

Investment information

The investment information segment mainly consists of three parts: IFIS Research Manager, IFIS Consensus, and Retail investors services.

The IFIS Research Manager collects brokerage research reports (i.e., analyst, industry, economic, strategy, etc reports), organizes them by brokerage firm, analyst, company, ratings, etc and makes them available for viewing online. Additionally, the company collects and organizes investor relations information from companies as well. Investors pay a monthly fee to access information.

With IFIS Consensus, IFIS collects analyst estimates from reports and calculates a consensus estimate. The analyst estimates as well as IFIS’ consensus estimate is made available online. This is linked to IFIS Research Manager. Investors pay a monthly access fee for this as well.

Retail investor services is mainly a simplified adaptation of the IFIS Research Manager and IFIS Consensus, but for non-professional investors. Additionally, IFIS (partnered with Yahoo Japan [TSE: 4689]) offers a free-site where retail investors can access IFIS consensus estimates, earnings report schedules, news and more.

Source: IFIS/Yahoo Japan Finance


Document Solution

The Document Solution segment can be further categorized into two parts based on its customer base: financial institutions and e-commerce store operators.

IFIS prints and delivers documentation for brokerage firms, insurance companies, and banks. This is where IFIS got its start. In addition to printing and mailing documentation, IFIS also offers fax and email services. Some of the more modern services include offering IFIS Research Manager and Consensus information to investor relations departments of publicly listed companies.

The e-commerce portion of this segment is one of the few parts that is unrelated to financial industry. IFIS launched W2P (Web-To-Print), a platform where users can create an online storefront, design custom t-shirts, cups, business cards, and just about anything printable, have customer orders delivered, all without actually touching or manufacturing products. In other words, it’s an e-commerce platform with the ability to design and produce custom goods without actually producing them. IFIS charges a setup fee, monthly fee, and collects a percentage of sales.

Source: W2P


Fund Disclosure

Through the Fund Disclosure segment, IFIS designs, prints, and delivers documents like prospectuses, investment reports, and other documentation for investment funds. Additionally, the company prepares documents that funds are required to submit to EDINET (Japanese equivalent of EDGAR).

IT Solution

The IT Solution segment is mainly engaged in financial software design, development, and operations as well as enterprise software design, development, and implementation. Additionally, the company offers system migration services.

Overall

Collectively, here is how IFIS has performed historically:

Source: Company filings


Source: Company filings


As with many companies serving the financial industry, IFIS’ business performance came in weak during the global financial crisis. Interestingly, the company is increasing its focus on W2P, with 3 of its 24 page earnings presentation (2017) highlighting the service. As of fiscal 2017, W2P for 253 million yen ($2.3 million USD) in revenues, or about 5.1% of total annual revenues. Another area of focus is the investment information segment. The company is expanding its service offerings for internet brokers like Monex (TSE: 8698) and Rakuten Securities to include financial analysis tools and AI-generated news.

Management guidance

For fiscal 2018 (ending December 31st, 2018), IFIS management guided for 5,250 million yen ($48.3 million USD, +6.8% YoY) in revenues and 740 million yen ($6.8 million USD, +8.3% YoY) in operating income. Three quarters in, the company is on track to exceed guidance with revenues up 11.5% and operating income up 31.8% compared to the same period last year.

Shareholders

As of Q3 2018 (ending September 30th, 2018), IFIS Japan had 10,242,000 shares issued and 582,239 shares in treasury, putting outstanding shares at 9,659,761.

Here are the major shareholders:

Source: Company filings & Nikkei


Most recently on November 27th, 2018 (Japanese), Kazuharu sold 300,000 of his 1,009,000 personal shares for 632 yen per share in an off market transaction. The company noted that the intention of the off-market transaction was to improve the distribution and liquidity of the company’s stock. According to the company’s 2017 filings, IFIS had 1,994 investors at the end of 2017. Generally, companies traded on Section 1 of Tokyo are expected to keep a shareholder count of above 2,200. It’s safe to say Kazuharu doesn’t have ulterior motives for selling part of his stake. The Osawa family collectively still holds a 46.9% stake in IFIS.

The company does not offer equity based compensation to its executives.

Financial & Valuation

  • IFIS Japan started out as an outsourced document printing and delivery business for financial institutions 24 years ago, then successfully transformed into an online platform for financial information.
  • Over the last four fiscal years, the company delivered record level operating income. Based on the current trajectory, it appears that 2018 will be another record year.
  • Although recent business performance is stellar, it’s important to note that company revenues and operating income declined by 14.7% and 74.2% respectively, from 2008 to 2009 amid the global financial crisis.
  • In other words, it’s best to look at IFIS with a “normalized” environment in mind. This is especially true when considering that the company didn’t recover to pre-crash business performance until 2013.
  • Unless IFIS establishes a non-financial service as a reliable source of income during difficult times, it’s appropriate to say that the company trades at fair value today with a share price of 570 yen.

Currently, IFIS Japan trades at 570 yen per share, putting the market cap at 5,506 million yen ($50.7 million USD). Net cash is 2,070 million yen ($19.1 million USD), or 37.6% of market cap. This puts the company’s enterprise value at 2,633 million yen ($24 million USD) for an EV/EBIT ratio of 3.1x.

Because IFIS is on the border of Tokyo Stock Exchange’s shareholder count requirement for section 1 listing, it’s unlikely that the company will repurchase shares anytime soon. With that said, IFIS’ dividend payout ratio has remained below 20% over the last several years, and it’s highly likely that dividends will increase with continued business performance.

Cash, at 2,873 million yen ($26.5 million USD), accounts for 67.3% of IFIS’ assets. Aside from that, the company has notable assets of 529 million yen ($4.8 million USD) in receivables, 358 million yen ($3.3 million USD) in goodwill, and 234 million yen ($2.2 million USD) in investments.

Although the company looks like a bargain at 3.1x EV/EBIT, it’s worth noting that IFIS has been delivering record level revenues and operating income for four straight years. Moreover, business performance quickly deteriorated during the global financial crisis, with company revenues and operating income declining by 14.7% and 74.2% between 2008 and 2009, respectively. Hence, it’s important to keep a “normalized” environment in mind when analyzing IFIS.

Source: Company filings


The average of the last 10 years of IFIS’ operating income comes out to 340 million yen ($3.1 million USD). If we use this figure in place of current operating income, EV/EBIT comes out to 7.7x, a bit on the high end for microcaps in Japan. With that said, the company has momentarily traded above 20x EV/EBIT on two occasions, once in 2010 and again in 2013. The more normal range has been between 2x and 6x.

What’s particularly interesting is IFIS’ move into a non-financial sector. Currently, the e-commerce business only amounts to 5.1% of company revenues. If this were to grow meaningfully, it could become a stable source of operating income during difficult times. Until this materializes, it’s appropriate to note that IFIS trades at roughly fair value today.

The bottom line

IFIS Japan started out as an outsourced document printing and delivery business for financial institutions 24 years ago, then successfully transformed into an online platform for financial information. Although the company has delivered record level business performance over the last four years, its business is largely susceptible to the swings of the market environment. More recently, the company is increasing its focus on non financial services, entering into the e-commerce platform market. Today, this accounts for 5.1% of company revenues. Until non-financial service revenues grow meaningfully and become a stable source of income during difficult times, it’s appropriate to say that IFIS trades at fair value today at 570 yen per share.


Kenkyo Investing
Kenkyo Investing

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