Thinking Points

  • Semba (TSE: 6540) is a small but expanding player in the Japanese retail planning and design market.
  • The company mainly caters to specialty shops and shopping centers, taking on everything from initial market research and design, to tenant finish and renovation planning.
  • Since its IPO in late 2016, business performance has declined. However, the company is actively pursuing non-retail customers, which has meaningfully converted into revenues.
  • At today’s 844 yen per share price, the company trades at a 0.9x EV/EBIT multiple. Adjusted for stock options and investment security holdings, the EV/EBIT is even lower at 0.6x. This is considerably lower than peers and fair value ought to be around 3x.
  • Investing at today’s price, investors can expect a three year investment CAGR of between 9.7% and 13%.

Introduction

Semba (TSE: 6540) primarily plans and designs retail stores and shopping centers in Japan. The company handles everything from initial market research and design to tenant finish and renovation planning. Though Semba operates through a single segment, revenues are categorized into two buckets: Specialty shops and large scale commercial.

Source: Company filings (2017)


The company has been in operation since 1962, but only recently went public in late 2016. Business performance since the IPO appears weak, however, this is more a function of large scale projects coming to an end in 2015. Additionally, the company is shifting strategy to take on non-retail projects as well.

The business & environment

The roots of Semba can be traced back to pre-WWII Japan, when Shiro Kuriyama sold glass cases at Kuriyama Glass Shop in Osaka. The company later expanded into Tokyo (1958), which then became today’s Semba (1962).

The 1960s was an interesting time for Japanese retail as shopping centers took the industry by storm, rapidly displacing department stores. In 1968, Semba welcomed its first class architect, thereby starting its shopping center planning and design consulting business. Since its earliest days, the company has been internationally minded, training and inspecting the US and European retail environment since the 1960s.

Much of the 1970s was characterized by expanding coverage area, opening offices in Sapporo, Sendai, and Fukuoka. The 1980s was characterized by opening international offices (Hong Kong, Taiwan) and strengthening the company’s production network. In 1991, the company developed its proprietary “Mesh Data System”, a system that helps analyze characteristics of towns across Japan.

Today, Semba has international offices in Hong Kong, Taiwan, Singapore, Shanghai, Ho Chi Minh, and Hanoi, which account for 6.8% of company revenues (2017):

Source: Company presentation (2017)


Online retail has changed Japanese retail, just as it has other first world nations. Interestingly, however, the Japanese retail display market and shopping center count has been growing:

Source: Company presentation (2016)


As mentioned in the introduction, Semba’s business performance since IPO appears weak:

Source: Historical company filings


Ordinary income is used in place of operating income between 2011 and 2014 in the chart above. In his IPO interview with Stock Voice (Japanese), Semba CEO Hirokazu Kuriyama noted the close-out of a couple major projects in 2015.

With the recent IPO, many financial data sources likely only have data tracing back to 2014. The IPO filings, however, contain basic financials going back to 2011. With this longer-term context, it appears that Semba’s business performance settled back to normalized margins. Interestingly, competitor Space (TSE: 9622) has maintained operating margins above 6% for the better part of a decade. Larger competitors like Tanseisha (TSE: 9743) and Nomura Kougeisha (TSE: 9716) have maintained operating performance more comparable to Semba, but generally stronger.

More recently, Semba shifted its strategy to include non-retail customers as its target. As an example, the company has taken on work for blood banks, libraries, colleges, and more:

Source: Company presentation (2016)


In its fiscal 2017 earnings release, the company guided for 30,000 million yen ($275 million USD, +1.6% YoY) in revenues and 1,550 million yen ($14.2 million USD, +9% YoY) in operating income for fiscal 2018. However, shortly before its H1 2018 release, the company adjusted guidance down to 28,800 million yen ($264 million USD, -2.5% YoY) in revenues and 1,270 million yen ($11.6 million USD, -10.7% YoY) in operating income. Management attributed the weak performance to a slowdown in investment by specialty shops, increased competition, and higher mix of projects that require outsourced work.

Shareholders

As of Q3 2018 (ending September 30th, 2018), Semba had 9,855,000 shares issued and no shares in treasury, putting outstanding shares also at 9,855,000. Additionally, the company has 765,000 unexercised stock options.

The major shareholders are:

Source: Company filings and Nikkei


Riya Kosan is the Kuriyama family’s fund (Japanese). Collectively, the Kuriyama family holds 60.7% of issued shares. It’s unclear whether Atsuko Hirosawa is part of the founding family. Even after adjusting for unexercised shares, the family owns 56.3% of shares.

According to company filings (2017), stock options were given to 4 directors, 301 employees, and 69 officers and employees of subsidiaries on March 24th, 2014. The exercise price is 280 yen per share, with 140 yen of paid in capital. The options are exercisable on the following schedule:

Source: Company filings (2017)


5,000 options were exercised during Q2 2018, which means there are 17,500 currently exercisable, but not-yet-exercised shares.

Cumulatively, unexercised stock options account for 7.8% of currently issued shares.

Financials & Valuation

  • Although Semba was recently listed (2016), the company is a well-established retail design and planning firm with a history extending over 70 years.
  • Its business largely caters to physical retail. Even with the rise in online retail, however, demand for physical retail has remained strong.
  • The company maintains a healthy balance sheet with a 0.53 equity-to-asset ratio. Adjusted for investment security holdings, Semba is just shy of being net cash positive.
  • At today’s 841 yen per share price, Semba trades at 0.9x EV/EBIT. Adjusted for investment security holdings and unexercised stock options, current EV/EBIT is still at 0.6x.
  • Investors can expect a three year investment CAGR of between 9.7% and 13% after accounting for stock options, dividends, and investment security holdings.

Semba had its IPO in late 2016, but is a long-established retail design and planning firm with a rich history extending over 70 years. Despite online retail pressuring physical retail, Semba’s primary customer base, the display market in Japan has remained strong. Moreover, the company is expanding outside of retail, taking on projects for blood banks, libraries, colleges, and more.

As of Q3 2018, the company had cash & equivalents of 7,192 million yen ($65.8 million USD) and total liabilities of 8,421 million yen ($77.1 million USD). Additionally, Semba had 969 million yen ($8.9 million USD) in investment security holdings. Overall, the company is a hair shy of being net cash positive, with a healthy 0.53 equity to asset ratio. Another attractive trait about Semba’s financials is its free cash flow yield, which has regularly remained above 4%.

At today’s 841 yen per share price, Semba trades at an unadjusted 0.9x EV/EBIT. Two key adjustments that need to be made for enterprise value calculation are: adding investment security holdings as cash equivalent and adjusting market capitalization for unexercised stock options.

Net of both adjustments, Semba trades for 0.6x EV/EBIT. As a point of reference, here are a few metrics for Semba and its key competitors:

Source: Company filings, GuruFocus, Nikkei


Semba is the smallest in the industry by a wide margin. Moreover, recent operating performance is considerably less attractive than its competitors. With that said, the company remains perfectly healthy. A fair EV/EBIT multiple for a profitable company of Semba’s size ought to be around 3x.

If annual revenues dropped down to 20,000 million yen ($183 million USD) and operating margins weakened to 4%, Semba’s stock option and investment security holding adjusted fair value share price would be around 1,100 yen per share in three years. Investors can expect an investment CAGR of 9.7% in this case.

If annual revenues recovered to 30,000 million yen ($275 million USD) and operating margins improved to 5%, Semba’s adjusted fair value share price would be around 1,215 yen per share. With this performance, investors can expect a three year investment CAGR of 13%.

Dividend seeking investors ought to strongly consider Semba as the company is guiding to payout 40 yen per share in dividends, which is equivalent to a dividend yield of 4.7%.

The bottom line

Semba is a small but expanding player in the Japanese retail planning and design market. Although its core customer base is specialty stores and shopping centers, the company has actively pursued non-retail projects like blood banks, libraries, and colleges since its IPO in late 2016. Compared to its peers, Semba’s scale is considerably smaller and its operating performance weaker. With that said, the company is comfortably profitable and trades at an adjusted 0.6x EV/EBIT multiple at today’s 844 yen per share price. Investors can expect an investment CAGR of between 9.7% and 13% over the next three years.


Kenkyo Investing
Kenkyo Investing

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