Thinking Points

  • With Us (TSE: 9696) is a mid-tier education company primarily operating group tutoring schools and secondarily operating correspondence high schools.
  • As competition intensifies with Japan’s population decline, the company has ventured out of its historical target market of pre to high school Japanese students in the last decade or so.
  • Much of the company’s recent revenue growth has been driven by other new businesses, including corporate talent development, translation and multilingual staffing services, and more.
  • At 406 yen per share, With Us trades at an adjusted EV/EBIT of negative 0.3x and a market capitalization of 3,846 million yen ($36.4 million USD).
  • Investors can expect an investment CAGR of between 22.1% and 26.6%, inclusive of dividends, over the next three years with a current forward dividend yield of 3.9%.

Introduction

With Us Corporation (TSE: 9696) primarily operates tutoring schools and secondarily operates correspondence high schools. Additionally, the company also provides career support education, online corporate training, Japanese language education, and more. With Us operates through three segments: Tutoring School, Correspondence School & Career Support, and Other:

Source: Kenkyo Investing, based on company data

Although With Us revenues have grown at 2.4% CAGR over the last decade, its core business – Tutoring Schools and Correspondence Schools & Career Support – has remained relatively stable with a ~1% CAGR. Much of the company’s growth was driven by the Other segment, including M&A activity, resulting in an expanding line of businesses.

The business & environment

With Us was founded by Kazuaki Horikawa in Osaka in 1976. The company started out as a group tutoring school, opening two schools in the first year of its operation. By 1985, With Us started offering college preparation tutor schools geared for high school students. 

For the first 15 years in operation, the company was solely a tutoring school operation, mostly operating under its flagship Dai-ichi Seminar branded schools. The company didn’t expand outside of it core business area until 1992, when it started an advertising agency. 

The advertising agency first operated in the Kansai region, With Us’ home turf. In 1994, With Us setup a separate advertising operation to cover the Kanto region (Tokyo & surrounding areas). In the decade following, the company setup tutoring schools with a variety of specialties and expanded into other education-related services. These include private-tutoring schools, correspondence high schools, speed reading schools, and English immersion preschools.

By the mid-2000s, With Us’ business resembled what its core operation looks like today. More recently, the company started venturing outside of its target market of pre-school to high school Japanese children. 

The movement started in 2010 when the company acquired Revic Global, a corporate talent development company primarily engaged in creating educational content. In 2016, the company acquired Kikko, a translation and multilingual staffing agency. Most recently in 2017, With Us acquired Genki Global, which offers Japanese language classes to foreign students in Japan.

With a shrinking and aging population, With Us’ core business faces an increasingly competitive business environment. In many ways, however, With Us has been able to stay ahead of the curve by venturing outside of its historical target market of pre-school to high school Japanese students. While the company mostly maintained its core revenues, the new target market businesses, although not all organic, appears to have contributed to revenue growth in the last decade or so:

Source: Kenkyo Investing, based on company data

What’s particularly interesting about the company’s reporting for its core operation is that it stopped disclosing the number of students enrolled in 2019. This happened despite what seems to be resilient enrollment numbers by With Us leading up to 2018.

Source: Kenkyo Investing, based on company data

In the 2019 filings, With Us noted that student enrollment increased by 9.6% YoY for the Correspondence School & Career Support segment, with no reference to enrollment figures for the Tutoring School segment.

Meanwhile, the company posted record high sales and strong operating performance in 2019:

Source: Kenkyo Investing, based on company data

For FY03/20, With Us is expecting revenues of 17,600 million yen ($167 million USD, +3.8% YoY) and operating profit of 1,200 million yen ($11.4 million USD, +1.6% YoY). As of Q1 FY03/20 (ending June 30, 2019), the company booked the strongest Q1 revenue performance since its founding, increasing revenues by 7.9% YoY. With the school year starting in April in Japan, Q1 tends to be the slowest month of the year.

Shareholders

As of Q1 FY03/20, With Us had 10,440,000 shares issued and 967,228 shares in treasury, putting outstanding shares at 9,472,772.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

Hint & Hit is the Horikawa family’s investment fund. In total, the family owns 23.3% of outstanding shares. In September 2018, the Horikawa family offloaded 135,000 shares at 401 yen per share (total of 54.1 million yen, or $5.1 million USD) in an off-market transaction with Gakken Holdings (TSE: 9470) as a part of forming a business partnership. 

Separately, the company has 115,000 unexercised options (~1.2% of outstanding shares) outstanding. All options were given to executive management in three different rounds and are currently exercisable, with the highest exercise price of 326 yen per share.

The company repurchased 626,400 shares (~6.2% of outstanding shares at the time) at 406 yen per share (total of 254 million yen, or $2.4 million USD) in February 2019 as a part of the cancellation of a business partnership with Zoshinkai Holdings (private).

Financials & Valuation

  • With Us is a mid-tier education company primarily operating group tutoring schools and secondarily operating correspondence high schools.
  • As competition intensifies with Japan’s population decline, the company has ventured out of its historical target market of pre to high school Japanese students in the last decade or so.
  • Much of the company’s recent revenue growth has been driven by other new businesses, including corporate talent development, translation and multilingual staffing services, and more.
  • At 406 yen per share, With Us trades at an adjusted EV/EBIT of negative 0.3x and a market capitalization of 3,846 million yen ($36.4 million USD).
  • Investors can expect an investment CAGR of between 22.1% and 26.6%, inclusive of dividends, over the next three years with a current forward dividend yield of 3.9%.

For its first 15 years in operation, With Us focused on its core group tutoring school operation, operating under its flagship Dai-Ichi Seminar brand. The company then expanded into operating correspondence high schools, private tutoring schools, and a couple of advertising agencies in the following decade leading up to the mid-2000s.

More recently over the last decade or so, With Us started venturing outside of its historical target market of pre to high school aged Japanese students. Starting with the acquisition of a corporate talent development company in 2010, With Us added Japanese language schools for foreigners as well as translation and multilingual staffing agency services to its business lineup.

Although none of the new business lines are large enough to call a new core operation, it has contributed significantly to recent revenue growth. Meanwhile, the Tutoring School segment and Correspondence School & Career Support segment delivered resilient performance amidst an increasingly competitive environment.

At 406 yen per share, With Us trades at an EV/EBIT of 0.5x and a market capitalization of 3,846 million yen ($36.4 million USD). Adjusted for long-term investment securities of 968 million yen ($9.2 million USD), the company trades at an adjusted EV/EBIT of negative 0.3x.

With Us maintains a relatively capitally efficient operation, with an equity to asset ratio of 0.33. Just a decade ago, the company relied on debt for operations, but has since serviced the bulk of its debts, incurring considerably lesser amounts of interest payments in recent years.

Source: Kenkyo Investing, based on GuruFocus data

The last time the company generated negative free cash flow was in FY03/13, when it first implemented an installment payment program for its schools, significantly reducing deposit amounts. Combined with net losses, primarily as a result of non-cash write-offs of 293 million yen ($2.8 million USD) incurred due to deteriorating business performance at some of its schools. 

While the equity to asset ratio has remained more or less the same compared to a decade ago, With Us has managed to reduce interest expense, maintain core operation business performance, and preemptively venture into non-core target markets. Although competition will continue to intensify for its core business, With Us is in a better position to generate profits and free cash flow now than it was a decade ago. 

Assuming a no-growth scenario, normalized operating profit (5-year average), and a fair value adjusted EV/EBIT multiple of 2 to 3x,  investors can expect an investment CAGR of between 22.1% and 26.6%, inclusive of dividends, over the next three years. As a side note, the company’s forward dividend yield as of this writing is 3.9%.

The bottom line

With Us is a mid-tier education company primarily operating group tutoring schools and secondarily operating correspondence high schools. In recent years, amid an increasingly competitive business environment, the company has ventured out to other business lines targeting non-core markets. Meanwhile, its balance sheet strength has improved over the last decade, significantly reducing debt levels and interest expenses while improving profit generation capabilities. At today’s 406 yen per share, investors can expect an investment CAGR of between 22.1% and 26.6%, 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.