Thinking Points

  • Hirayama Holdings (TSE: 7781) is a fast growing staffing and outsourcing company with a focus on the manufacturing industry.
  • With its unique approach to staffing, the company has successfully carved out a niche in the manufacturing industry, specializing in contracting entire manufacturing facilities rather than personnel like most staffing agencies.
  • Through a recent acquisition, the company strengthened its exposure to the food retail industry, balancing out its portfolio which was previously heavily reliant on the medical sector.
  • At 2,600 yen per share, Hirayama Holdings trades at an adjusted 11.4x EV/EBIT with a market cap of 4,496 million yen ($40.2 million USD).
  • Investors are best advised to keep Hirayama Holdings on a watchlist and revisit the company if share prices fall to the 2,000 yen level, the company delivers 12+% annualized revenue growth, or some combination of both with operating performance improvements.

Introduction

Hirayama Holdings (TSE: 7781) is a staffing agency with a particular focus on the manufacturing industry. Additionally, the company has a growing foreign operation, mainly in the southeast Asia region. The company reports through four segments: Insourcing, Engineer Staffing, Foreign Operations, and Other.

Source: Company filings


Hirayama Holdings calls itself a “manufacturer without facilities and land”. This is rooted in the company’s unique approach to staffing. In addition to standard staffing where staff are sent to customer facilities, Hirayama offers outsourced manufacturing services where Hirayama manages and staffs the customer manufacturing facility.

The business & environment

Hirayama Holdings’ roots can be traced back to 1955, when Joichi Hirayama founded the company as a consumable goods wholesaler in Yamaguchi prefecture. In a 2017 Cow TV interview (Japanese), Joichi’s son and current CEO Yoshikazu Hirayama explained how the company transformed from a wholesaler to a staffing agency.

In the mid 1980s, shortly after Yoshikazu graduated from college and started working, his mother passed away. During the same time, the family business had been generating losses. Previously, Yoshikazu’s mother had been in charge of accounting. After her passing, Joichi needed help, and called on Yoshikazu and his siblings to return home.

Upon Yoshikazu’s return, the family first tried reaching profitability through expanding the existing wholesale business. Being located in a remote area in Yamaguchi prefecture, however, the family quickly realized the limitation of expanding its wholesale business. After that, the family tried out various new lines of businesses.

This was all happening at the peak of Japan’s economic bubble. Yoshikazu recalls seeing many job listings while noticing a seemingly perpetual labor shortage. This is when he started thinking that a service oriented business would be more of a growth area going forward. Yoshikazu proceeded to start the staffing business alone.

Yoshikazu kicked off by opening a sales office in a more populated Hiroshima. It was about six months before he was able to find a customer. Two years in, company revenues reached 1 billion yen ($8.9 million USD). As soon as the Japanese economic bubble collapsed, however, company revenues declined to a fifth of what it was.

With the bubble collapse as a turning point, Yoshikazu decided to move into the greater Kanto region (where Tokyo is located). In doing so, he realized there were already many businesses in the same line of work, and that he would need to differentiate the company’s offerings.

This was when he decided to focus on manufacturing. In a typical staffing business, contracts end when the contract expires and the customer no longer wants to renew. On the other hand, when contracting a manufacturing operation, the customer is likely to keep renewing contracts as long as they intend to keep the manufacturing facility open.

With this contract structure, Hirayama is paid based on its productivity rather than labor hours, increasing business risk and opportunity at the same time. Hirayama calls the traditional staffing model “Staffing” and the manufacturing facility contracts “Insourcing”. Both businesses are currently a part of the same segment.

In 2009, Hirayama started its engineer staffing business through an acquisition. Then in 2011, the company opened its first foreign office in Vietnam. After that, the company listed its shared on the Tokyo exchange 2015.

The company has grown considerably over the last six years:

Source: Company filings


For fiscal 2019, the company guided for 20,000 million yen ($179 million USD) in revenues and 300 million yen ($2.7 million USD) in operating income. Much of this is expected due to the company’s acquisition of FUN-T-FUN, which has a staffing business model similar to Hirayama, except in the food industry. The company provides small grocery store operation services in urban areas. Acquisition price was kept private as a part of the M&A agreement.

As of Q2 2019 (ending December 31st, 2018), Hirayama delivered 10,118 million yen ($90.4 million USD) in revenues and 167 million yen ($1.5 million USD) in operating income. The company noted the increase in revenues were largely a function of the acquisition, but also noted that the insourcing and staffing segment delivered healthy revenue growth.

Prior to the acquisition, much of Hirayama Holdings’ revenues came from medical manufacturing, which accounted for approximately 40% of 2018 revenues. Much of this was derived from Terumo (TSE: 4543), which accounted for 28.8% of 2018 revenues. After the acquisition, medical and food account for approximately 26% of revenues each, followed by automotive at 16%.

Shareholders

As of Q2 2019 (ending December 31st, 2018), Hirayama Holdings had 1,790,004 shares issued and 58,541 shares in treasury, putting outstanding shares at 1,731,859.

Here are the major shareholders:

Source: Company filings and Nikkei


Three Arrows is Yoshikazu’s asset management company and Hakuto Corporation is the Hirayama family fund. Collectively, the Hirayama family controls 66.1% of outstanding shares, with Yoshikazu in control of 41.5% of outstanding shares.

There are 269,700 shares worth of unexercised stock options outstanding. This is equivalent to 15.6% of currently outstanding shares. All of these are currently exercisable.

Financials & Valuation

  • Hirayama Holdings transformed from an unprofitable wholesaler to a rapidly growing staffing and outsourcing company over the course of the last three decades.
  • With its unique approach to staffing, the company has successfully carved out a niche in the manufacturing industry, specializing in contracting entire manufacturing facilities rather than personnel like most staffing agencies.
  • Through a recent acquisition, the company strengthened its exposure to the food retail industry, balancing out its portfolio which was previously heavily reliant on the medical sector.
  • At 2,600 yen per share, Hirayama Holdings trades at 11.4x EV/EBIT with a market cap of 4,496 million yen ($40.2 million USD).
  • Investors are best advised to keep Hirayama Holdings on a watchlist and revisit the company if share prices fall to the 2,000 yen level, the company delivers 12+% annualized revenue growth, or some combination of both with operating performance improvements.

Hirayama Holdings successfully transformed from an unprofitable family wholesale business to a rapidly growing and profitable niche staffing and outsourcing agency over the last three decades. CEO Yoshikazu, although technically a second generation family business operator, has demonstrated strong entrepreneurial qualities, effectively building Hirayama Holdings’ current business model from nothing.

In a 2017 Cow TV interview, Yoshikazu summarized Hirayama Holdings as “a manufacturer without facilities and equipment”. As such, the company is asset-light, with cash and receivables accounting for 78.3% of assets. The company also carries debt of 1,386 million yen ($12.4 million USD), but its balance sheet remains relatively healthy with a net current asset position of 1,481 million yen ($13.2 million USD).

The company provides a stronger value proposition than a traditional staffing agency by focusing on the manufacturing niche, particularly in contracting out entire manufacturing facilities. This changes the incentive structure for Hirayama Holdings. Instead of getting paid per head, the company is paid for productivity. Additionally, contracts tend to have a longer lifespan when contracting entire manufacturing facilities as compared to staffing.

Recently, Hirayama Holdings acquired FUN-T-FUN, which has a similar operation as Hirayama Holdings, except with a food retail twist. The company contracts and operates small urban grocery stores. The acquisition balanced Hirayama Holdings’ business portfolio, which was previously heavily exposed to the medical sector.

At 2,600 yen per share, Hirayama Holdings trades for 8.7x EV/EBIT on a trailing twelve month basis with a market cap of 4,496 million yen ($40.2 million USD). Between 2013 and 2018, the company grew revenues at 12.9% CAGR. This does not include the FUN-T-FUN acquisition. Post-acquisition, the company expects to reach 20,000 million yen ($179 million USD) in revenues, which would mark a 6-year 18% CAGR, although not all organic growth.

The company also has unexercised stock options which amount to 15.6% of outstanding shares. Taking this into account, the company trades for an adjusted 11.4 EV/EBIT. Although the multiple appears high for a company the size of Hirayama Holdings, the company has grown revenues quickly and aims to increase operating margins to 5% over the medium term.

Assuming medium term means three years, the company retains 25% of operating income in the form of cash, and annual revenues stay at 20,000 million yen ($179 million USD), time and option adjusted EV/EBIT multiples would look like this:

Source: Kenkyo Investing estimates


To be sure, there is considerable execution risk and a 3 ~ 6x EV/EBIT multiple would be appropriate for a company the size of Hirayama Holdings. Hence, investors are best advised to keep the company on a watchlist and revisit if share price comes down to the 2,000 yen level, the company continues its growth path at an organic pace above 12% CAGR, or some combination of lower share price decline/revenue growth rate along with operating performance improvement.

The bottom line

Hirayama Holdings is a healthy staffing and outsourcing company with a manufacturing niche. The company started out as a family business and is lead by second generation CEO Yoshikazu, who successfully transformed an unprofitable consumer goods wholesale business into a rapidly growing staffing and outsourcing company. At 2,600 yen per share, the company trades at an adjusted 11.4x EV/EBIT. Investors are best advised to keep Hirayama Holdings on a watchlist for now and revisit the company if share prices fall to the 2,000 yen level, the company delivers 12+% annualized revenue growth, or some combination of both with operating performance improvements.


Kenkyo Investing
Kenkyo Investing

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