Thinking Points

  • AJIS (TSE: 4659) is an inventory services company providing inventory stocking/auditing, asset auditing, temporary staffing, and other services primarily to the retail industry.
  • The company maintains a strong 50+% market share position in Japan, but its manpower-heavy operating model faces real threats from technological advancements such as electronic tags.
  • Meanwhile, the company’s overseas business as well as its retail support business is rapidly expanding, making up for the lack of growth in its core business.
  • At 1,971 yen per share, AJIS trades at an EV/EBIT of 1.3x with a market capitalization of 16,567 million yen ($153 million USD).
  • Assuming a worst-case scenario of 0 EV and best-case scenario of continued recent operating performance, investors can expect an investment CAGR of between -13.4% and 13.1%, inclusive of dividends, over the next three years.

Introduction

AJIS (TSE: 4659) is an inventory services company providing inventory stocking/auditing, asset auditing, temporary staffing, and other services primarily to the retail industry. The company operates through three segments: Domestic, Overseas, and Retail Support.

Source: Kenkyo Investing, based on company data

The company’s core Domestic business operates a labor-intensive business in a shrinking market with competitive pressures emerging through technological advancements. Moreover, AJIS faces operational issues, including a corrective guidance issued from Chiba Prefecture’s Labor Department regarding excess overtime hours. On a more positive note, however, the company is focused on its Retail Support and Overseas businesses, which have both grown consistently since inception.

The business & environment

AJIS was founded in 1978 as Japan’s first inventory service company. From the very beginning, the company focused on supporting operations for retail chains. In fact, AJIS was one of the earliest to implement barcode readers into its services back in 1985, keeping track of inventory data through SKUs.

The company’s core service since its founding is inventory restocking. Essentially, the company sends its employees to retail stores around closing time to restock shelves and conduct audits overnight. From there, AJIS branched out to various services surrounding retail chains such as inventory auditing, asset tracking, mystery shopping, merchandising, new store setup, staffing, and more. Revenues for its core Domestic segment recently stagnated while operating profits have improved:

Source: Kenkyo Investing, based on company data

In 2003, AJIS made its first leap outside of Japan when it set up its first overseas office in South Korea. The company quickly followed this up by setting up in China in 2004. From there on, AJIS entered various Asian countries. As of FY03/19, the company operates in S. Korea, China, Taiwan, Hong Kong, Vietnam, Malaysia, Thailand, and Japan. The business appears to have reached an inflection point in FY03/16:

Source: Kenkyo Investing, based on company data

The Retail Support segment consists of concentrated restocking (overnight restocking), staffing, mystery shopping, and advertising support services. This business has reached an inflection point in FY03/14, generating strong revenue growth and consistent profits ever since:

Source: Kenkyo Investing, based on company data

Although growth stagnated for its core Domestic segment, the Overseas and Retail Support segments have posted strong growth in recent years, resulting in record high revenues and operating profits overall for the last several years:

Source: Kenkyo Investing, based on company data

As of FY03/19, AJIS leads the inventory services market in Japan, estimating its own market share at 77%. The company services over 2,500 companies and 210,000 stores covering all 47 prefectures in Japan. 

Amidst the explosive revenue and operating profit growth over the last several years, however, operational issues came to public attention when Chiba Prefecture’s Labor Department issued a corrective guidance to AJIS in May 2016. According to the press release (Japanese), four offices were cited with 63 workers having over 100 hours per month of overtime. One of the offices had 197 hours of overtime per month. This is about equivalent to working a double shift every weekday.

Given AJIS’ manpower heavy business and industry position, its biggest competitors are technological advancements (i.e., warehouse automation, electronic tagging, etc) and companies performing inventory related tasks in-house. In fact, the Japanese government has been pushing for widespread electronic tag use in the convenience store industry. The technology already exists, but the key bottleneck has been cost (target of 1 yen per chip vs. current 5 yen per chip). 

Since AJIS’ customer base mainly consists of retail chains rather than individually operated stores, it is at risk of losing business should technological advancements such as electronic tags catch on. This is listed as a key risk factor in the company’s filings. Moreover, the company operates a manpower-heavy business in a tightening labor market. Overall, while recent business performance has been stellar, AJIS faces serious eventualities that are highly likely to affect its operating business model over the next several years.

With that in mind, AJIS expects FY03/20 revenues of 28,500 million yen ($263 million USD, +3.0% YoY) and operating profits of 4,000 million yen ($36.9 million USD, +5.9% YoY). As of Q3 FY03/20, the company reported revenues of 19,962 million yen ($184 million USD, +3.0% YoY) and operating profits of 2,384 million yen ($22.0 million USD, +9.9% YoY).

As a side note, AJIS has not made any coronavirus related announcements. Its domestic customer base leans heavily toward subcategories of the retail industry generally considered essential such as convenience stores, supermarkets, and drug stores. 

Source: Kenkyo Investing, based on company data

Shareholders

As of Q3 FY03/20 (ending December 31, 2019), AJIS had 10,771,200 shares issued and 2,362,401 shares in treasury, putting outstanding shares at 8,408,799.

Here are the major shareholders:

Source: Kenkyo Investing, based on company filings and Nikkei

The founding Saito family (including Mihoko Kobayashi) holds 46.9% of outstanding shares. Interestingly, according to a 2015 filing by Saito Holdings, nearly 100% of the 1,671 million yen ($15.4 million USD) in capital allocated for purchasing shares was debt financed.

The company consistently pays out dividends and periodically repurchases shares. Most recently, AJIS repurchased 400,000 shares (4.5% of outstanding shares) at 3,205 yen per share for a total repurchase amount of 1,282 million yen ($11.8 million USD) in FY03/19. All 400,000 shares were sold by CEO Akio Saito.

Prior to that, the company repurchased 300,000 shares (7.0% of outstanding shares, pre-split) at 2,982 yen per share for a total repurchase amount of 895 million yen ($8.3 million USD). All 300,000 shares were sold by Saito Holdings

Although the Saito family owns a significant stake in AJIS, the debt-financed nature of the family fund as well as the underlying motivation of the repurchases are concerning.

Financials & Valuation

  • AJIS (TSE: 4659) is an inventory services company providing inventory stocking/auditing, asset auditing, temporary staffing, and other services primarily to the retail industry.
  • The company maintains a strong 50+% market share position in Japan, but its manpower-heavy operating model faces real threats from technological advancements such as electronic tags.
  • Meanwhile, the company’s overseas business as well as its retail support business is rapidly expanding, making up for the lack of growth in its core business.
  • At 1,971 yen per share, AJIS trades at an EV/EBIT of 1.3x with a market capitalization of 16,567 million yen ($153 million USD).
  • Assuming a worst-case scenario of 0 EV and best-case scenario of continued recent operating performance, investors can expect an investment CAGR of between -13.4% and 13.1%, inclusive of dividends, over the next three years.

AJIS is the domestic leader in outsourced retail inventory services with over a 50% market share. The company’s key competitors are technological advancements such as electronic tags, and in-house inventory service operations by potential customers.

In terms of operating business quality, AJIS runs a low to medium quality business. This has less to do with mid-level management quality and more to do with its manpower dependent operations in an increasingly tightening labor market combined with rising competitive pressures from technological advancements. Issues raised by the Labor Department is also another reason for concern, especially because of the manpower dependent nature of the company.

Capital allocation and management quality is questionable at best, with the company led by a founding family member and the only recent notable share repurchases effectively being a transaction between the founding family and the company itself. More importantly, Saito Holdings, the founding family’s fund and the leading shareholder of the company, is almost purely debt financed, which raises some concerns.

Given the recent coronavirus pandemic, it’s difficult to reasonably gauge the company’s near-term performance. On the other hand, technological advancements pressure the operating model, making it difficult to reasonably gauge long-term performance. 

At 1,971 yen per share, AJIS trades at an EV/EBIT of 1.9x with a market capitalization of 16,567 million yen ($153 million USD). Adjusted for long-term security holdings (which mostly consists of bonds), the company trades at 1.3x EV/EBIT.

Assuming a worst-case scenario of 0 EV and best-case scenario of continued recent operating performance, investors can expect an investment CAGR of between -13.4% and 13.1%, inclusive of dividends, over the next three years.

The bottom line

AJIS is Japan’s leading outsource retail inventory services provider with over 50% market share. While the company has recently delivered strong operating performance, its operating model is under pressure due to technological advancements. Investors can expect an investment CAGR of between -13.4% and 13.1%, 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.