Thinking Points

  • KG Intelligence (TSE: 2408) is a regional free newspaper publisher specializing in recruitment and lifestyle related content.
  • As the internet progressively displaces paper-based media as an information source, the company faces major challenges trying to replace its largely paper-based revenues.
  • Thus far, KG Intelligence hasn’t been able to find a way to stop its revenue decline. Moreover, its internal printing and delivery functions, which was once a competitive advantage, is now a key pain point, adding to fixed cost pressures.
  • At 367 yen per share, KG Intelligence trades at 61.0% of NCAV with a market capitalization of 2,655 million yen ($24.9 million USD).
  • Investors are best advised to steer clear of KG Intelligence as the company’s operating model is highly likely to continue producing losses in the foreseeable future.

Introduction

KG Intelligence (TSE: 2408) is a regional free newspaper publisher specializing in recruitment and lifestyle related content. While the company technically operates a single segment, it categorizes revenues into 3 categories:

Source: Company filings

Since 2013, KG Intelligence’s revenues have been declining as the internet has increasingly become the main source for information. At one point in time, the company’s internal functions, like printing and delivery, were its competitive advantage. With the recent revenue decline, however, these functions have added fixed cost pressures.

The business & environment

KG Intelligence was founded in 1980 when current CEO Takemi Masuda started Masuda Publishing as a sole proprietor in Takamatsu City, Kagawa prefecture. The company’s first area of focus was recruitment information in Kagawa prefecture, publishing Kyujin Gaido Kagawaban, or “Recruitment Guide Kagawa Edition”. 

The free newspaper series then expanded into neighboring Okayama prefecture in 1984. The expansion of geographical coverage into neighboring prefectures ensued, covering Ehime in 1985, then Tokushima and Hiroshima in 1989, and Hyogo in 1993. 

Next, the company ventured outside of recruitment. In 1995, KG Intelligence started publishing a free newspaper focused on recreational fishing, kicking off the lifestyle category. Additionally, the company started a job placement business in 1996.

Today, the bulk of the company’s revenues come from advertisement sales in the recruitment category. The lifestyle category consists of a variety of subcategories, like home-related, wedding related, and leisure activity related free newspapers and subcategory-associated websites.

Source: Company filings

According to 2018 filings, paper-based media accounts for 63% of annual revenues, down 10% compared to the previous year. While the company mentioned that internet-based revenues increased, the decline in paper-based revenue percentage was largely due to the discontinuation of a couple different lifestyle free newspapers. 

Source: Company filings

With the decline in revenues, the company started generating losses in 2018. More importantly, the company faces fixed cost pressures as it prints and distributes newspapers internally. With no sign of free newspaper recovery or discussions on asset conversions, the company will likely continue to generate losses until a major shift in strategy takes place.

For FY12/19, KG Intelligence initially forecasted revenues of 3,361 million yen ($31.6 million USD, +18.9% YoY) and operating profits of 130 million yen ($1.2 million USD, operating loss in FY12/18). In the Q2 FY12/19 filings, the full-year forecast was revised to revenues of 2,693 million yen ($25.3 million USD, -4.8%) and operating losses of 8 million yen ($75K USD). 

Shareholders

As of Q2 FY12/19 (ended June 20th, 2019), KG Intelligence had 7,398,000 shares issued and 164,985 shares in treasury, putting outstanding shares at 7,233,015.

Here are the major shareholders:

Source: Company filings & Nikkei

OHANA is the Masuda family’s investment fund. While OHANA and Takemi’s stake combined still accounts for less than half of outstanding shares, the Masuda family is effectively in control of the company with a 49.9% stake.

KG Intelligence has repurchased shares in the past, but there have been no material transactions recently. The last time the company repurchased shares was in FY12/14. 

In Q2 FY12/19, the company issued 164,450 shares (2.2% of outstanding shares) worth of stock options to its employees. 

Financials & Valuation

  • KG Intelligence is a regional free newspaper publisher specializing in recruitment and lifestyle related content.
  • As the internet progressively displaces paper-based media as an information source, the company faces major challenges trying to replace its largely paper-based revenues.
  • Thus far, KG Intelligence hasn’t been able to find a way to stop its revenue decline. Moreover, its internal printing and delivery functions, which was once a competitive advantage, is now a key pain point, adding to fixed cost pressures.
  • At 367 yen per share, KG Intelligence trades at 61.0% of NCAV with a market capitalization of 2,655 million yen ($24.9 million USD).
  • Investors are best advised to steer clear of KG Intelligence as the company’s operating model is highly likely to continue producing losses in the foreseeable future.

KG Intelligence started out as a regional free newspaper in 1980, specializing in distributing recruitment information. It proceeded to expand its geographical coverage to include Kagawa, Okayama, Ehime, Tokushima, Hiroshima, and Hyogo prefectures through the first 15 years of its existence.

Next, the company expanded its content coverage, introducing lifestyle related free newspapers for recreational fishing, home repairs and renovations, and wedding planning. Business performance remained healthy throughout most of the 2000s, with the exception of the global financial crisis, when advertisement revenues from its recruitment-related free newspaper declined significantly.

Although the company’s revenues recovered shortly after the financial crisis, it started declining again from FY12/13 and on, with no bottom in sight. At one point, KG Intelligence’s internal printing and delivery functions served as a competitive advantage. However, today, this serves as a bigger pain point, with fixed cost pressures. 

In FY12/18, KG Intelligence posted losses for the first time in over a decade. More importantly, the company has made no notable progress in changing its business model, and is likely to continue generating losses unless a drastic change in strategy takes place.

At 367 yen per share, KG Intelligence trades at 61.0% of NCAV with a market capitalization of 2,655 million yen ($24.9 million USD). Unlike many Japanese deep value companies, there is no need to adjust KG Intelligence’s NCAV figures as the company sold its long term investment security holdings in FY12/17 and FY12/18.

Additionally, since all of KG Intelligence’s properties are located outside of major Japanese metropolitan areas, we have not assessed land values. 

Currently, there is no clear path to profitability for KG Intelligence. While the company holds a net cash position equivalent to 152% of its current market capitalization, investors are best advised to steer clear of the company as the operating model is highly likely to produce losses for the foreseeable future.

The bottom line

KG Intelligence was a once-healthy regional free newspaper publisher with a presence in Kagawa, Okayama, Ehime, Tokushima, Hiroshima, and Hyogo prefectures. Internal printing and delivery functions, which were once a key competitive advantage, are now disadvantages. With information sources increasingly shifting to the internet, KG Intelligence faces a challenging environment, with seemingly no answer. Investors are best advised to steer clear of the company as the operating model is highly likely to produce losses for the foreseeable future.


Kenkyo Investing
Kenkyo Investing

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