Thinking Points

  • Tecnos Japan (TSE: 3666) is one of the earliest partners of SAP Japan, specializing in ERP system implementation before ERP became a widely known business term.
  • More recently, the company expanded its implementation support offerings to include other major ERP systems from vendors like Oracle and Infor.
  • With SAP’s looming support cut-off for its widely used ECC6 system, Japanese companies are forced to consider system migration options, giving Tecnos and other SAP partners a tailwind.
  • At 589 yen per share, Tecnos trades at an adjusted 11.6 EV/EBIT with a market capitalization of 12,068 million yen ($109 million USD).
  • Investors can expect an investment CAGR of between 0.5% and 14.8%, inclusive of dividends, over the next three years.

Introduction

Tecnos Japan (TSE: 3666) is a system integrator specializing in Enterprise Resource Planning (ERP) system implementation. More specifically, the company is well known as an SAP (ETR: SAP) partner, with a business relationship extending to 1996, before ERP systems were common place. Although the company is a single segment operation, it reports revenues by customer industry in its presentations:

Source: Company filings (2018)

While Tecnos got its start with SAP software, the company offers implementation support for major software systems like Oracle’s (NYSE: ORCL) JDE ERP system, Infor’s ERP systems,  and Tableau’s (NYSE: DATA) Tableau interactive data visualization software. Additionally, the company offers implementation support for domestic software like Toyo Engineering’s (TSE: 6330) MCFrame production and logistics management system.

The business & environment

Tecnos Japan was originally founded in 1994 by Masanori Tokuhira to offer custom information system development and consulting services. Realizing the growth potential for ERP systems, Masanori effectively started out by working on SAP products. He then pursued a partnership contract with SAP Japan, obtaining a formal partnership agreement in 1996 for SAP’s R/3 offering.

When Tecnos signed its partnership agreement with SAP Japan, ERP systems were still unfamiliar territory for many businesses. In fact, SAP Japan was only 4 years into operation, having been founded in 1992. Tecnos was among the earliest partners for the company.

Today, Tecnos is joined by 148 other firms as SAP Japan’s partner. Moreover, the company extended its implementation support offering to software systems by other vendors. Tecnos signed on with Toyo Engineering in 2005, Oracle in 2007, Infor in 2009, and Tableau in 2014.

With some fluctuation in top-line performance, Tecnos managed to post record-level operating performance over the last five years:

Source: Company filings

At the same time, the company is starting to focus on artificial intelligence (AI) and big data offerings, setting up Tecnos Data Science Engineering (TDSE, TSE: 7046) in 2013. Tecnos was later joined by NTT Data (TSE: 9613) and Aioi Nissay Dowa Insurance (subsidiary of MS&AD Insurance Group [TSE: 8725]) in owning and operating TDSE. The company is growing and profitable, having had its IPO in December 2018.

Source: Company filings

Tecnos currently owns 39.3% of TDSE’s outstanding shares, and TDSE’s financials aren’t included in Tecnos’ consolidated financials.

The ERP market is expected to grow steadily, with Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) offerings expected to overtake on-premise offerings:

Source: ITR Market View (Japanese), 2017-2021 figures are estimates

According to a 2015 research report (Japanese) by Nork Research, SAP’s ERP offerings took the #1 and #5 spots as the most used ERP system among small and medium sized enterprises in Japan. Combined, SAP had a 29.1% ERP market share for Japanese small and medium enterprises in 2015.

Interestingly, SAP’s market share based on annual installations trailed domestic firms OBIC Business Consultants (TSE: 4733, 25%) and OBIC (TSE: 4684, 15%) with a 10% share, tied with Microsoft Japan and Otsuka (TSE: 4768) according to the same research report. As a side note, OBIC Business Consultants is a part of the OBIC Group.

More interestingly, companies using SAP ECC6 face a 2025 problem, as SAP plans to end support on ECC6 in 2025. While presumably a tailwind for Tecnos, some sources say that a mass migration to newer systems is unlikely, and that SAP will likely extend its support for ECC6 (for a second time).

Japan is no exception, with an estimated 2,000 SAP user companies using the system in question. To add to the challenge, SAP’s next generation system HANA is exclusively tied to SAP’s database while older SAP offerings were capable of using a variety of platforms.

Overall, however, the looming support cutoff will be a tailwind for Tecnos. Going forward, the company is focused on cloud-based ERP system implementations as well as the Smart Factory and Smart Office movements associated with ERP systems. Additionally, Tecnos is working on leveraging Blockchain technology for contract, asset, and payment management. Through TDSE, the company aims to expand its big data and AI offerings as well.

For fiscal 2020, Tecnos is guiding for 8,200 million yen ($74.4 million USD, +17.6% YoY) in revenues and 830 million yen ($7.5 million USD, +6.1% YoY) in operating income.

Shareholders

As of Q4 2019 (ending March 31st, 2019), Tecnos had 20,400,000 shares issued and 680,200 shares in treasury, putting outstanding shares at 19,719,800.

Here are the major shareholders:

Source: Company filings & Nikkei

Masanori remains the largest shareholder in the company, but has not been in a managerial role or on the board since 2016. Today, the Tecnos is lead by Takashi Yoshioka, a long-time employee turned CEO in 2017.

NS is operated by previous Tecnos CEO and current TDSE CEO Naohiko Shirotani’s wife.

Unexercised options account for less than 1% of outstanding shares.

Financials & Valuation

  • Tecnos Japan is one of the earliest partners of SAP Japan, specializing in ERP system implementation before ERP became a widely known business term.
  • More recently, the company expanded its implementation support offerings to include other major ERP systems from vendors like Oracle and Infor.
  • With SAP’s looming support cut-off for its widely used ECC6 system, Japanese companies are forced to consider system migration options, giving Tecnos and other SAP partners a tailwind.
  • At 589 yen per share, Tecnos trades at an adjusted 11.6 EV/EBIT with a market capitalization of 12,068 million yen ($109 million USD).
  • Investors can expect an investment CAGR of between 0.5% and 14.8%, inclusive of dividends, over the next three years.

Founded in 1994, Tecnos Japan became one of the earliest SAP Japan partners, offering implementation support before ERP systems were commonplace. The company proceeded to extend its implementation support services to other system vendors like Oracle and Infor. More recently, the company started supporting Tableau Software implementation, an interactive data visualization tool commonly used in big data analytics.

With SAP’s looming ECC6 support cut-off, currently scheduled for 2025, Tecnos and other SAP partners are likely to enjoy a higher business volume in the near and medium term. One thing to note about Tecnos’ customer base, however, is that it is heavily geared towards manufacturers. Hence, a cyclical downturn is likely to negatively affect business performance. Since the company has only been publicly traded since 2012, it’s difficult to gauge the extent of business impact from a downturn.

As for the balance sheet, Tecnos doesn’t have significant land holdings and carries no debt. In its 2019 short form filings, however, the book value of investment securities increased from 452 million yen ($4.1 million USD) in Q3 2019 to 2,358 million yen ($21.4 million USD) in Q4 2019. As of this writing, the long-form filings, which provide a breakdown of investment securities, have not been released yet.

With that said, it is likely that the increase is due to TDSE’s IPO in December 2018. Additionally, the company recorded 989 million yen ($9 million USD) in one-time gains from selling TDSE shares. Some financial sources include this in EBIT calculations, distorting recent EV/EBIT ratios.

At 591 yen per share, Tecnos trades at an unadjusted EV/EBIT of 13.2x with a market capitalization of 12,068 million yen ($109 million USD). Adjusting for investment securities of 1,200 million yen ($10.9 million USD) instead of 2,358 million yen ($21.4 million USD) for conservative measure, the company trades at 11.6x EV/EBIT.

Assuming business performance in line with 2020 guidance (16% revenue CAGR) over the next three years, investors can expect an investment CAGR of 14.8%, inclusive of dividends, with a fair value adjusted EV/EBIT of 12x.

If business performance conservatively fares at 3% revenue CAGR over the next three years, investors can expect an investment CAGR of 0.5%, inclusive of dividends, with a fair value adjusted EV/EBIT of 10x.

Overall, Tecnos Japan’s growth appears promising. At the same time, however, the share price already includes much of the growth. Investors can expect  an investment CAGR of between 0.5% and 14.8%, inclusive of dividends, over the next three years.

The bottom line

Tecnos is an established system integrator with a specialization in SAP ERP systems. Among the earliest SAP Japan partners, the company expanded its implementation support service offerings to cover other popular systems from vendors like Oracle, Infor, and Tableau. With a looming support-phaseout for SAP’s legacy offerings, business performance is likely to remain strong over the near and medium terms for Tecnos and other SAP Japan partners. Overall, investors can expect an investment CAGR of between 0.5% and 14.8%, inclusive of dividends, 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.