Thinking points

  • Kyoei Security Service (TSE: 7058) is a mid-sized security service company primarily generating revenues by dispatching security officers to facilities, events, and condominiums. 
  • Key challenges for the company include the shifting demand in the security industry from manned security to machine security, and the resulting pressures in expanding manned security services.
  • Key opportunities include the gradual rise in security demand reflecting urbanization and pent-up demand following the COVID-19 pandemic.
  • At JPY3,000 per share, KSS trades at an adjusted EV/EBIT of 4.1x with a market capitalization of JPY4.4bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +5.1% to +13.6%, including shareholder returns, over the next 3-5 years.

Introduction

Kyoei Security Service (TSE: 7058; KSS hereinafter) is the sixth largest security service company in Japan in terms of the number of security guards employed. The company operates under three segments. In its Facility Security segment, KSS provides security and concierge services for offices, shopping malls, and airports. In its Event Security and Crowd-control segment, the company dispatches security guards for construction sites, traffic control, events and highways. Finally, in its Other segment, KSS provides personal security services for VIPs such as executives and celebrities. 

Source: Kenkyo Investing, based on company data

Business & operating environment

Company History

KSS was founded in 1985 by Fumio Azuma (CEO). The company got its start by providing traffic control services, then proceeded to offer facility and event security services in 2000, providing security for major events including the 2002 FIFA World Cup Japan/Korea. It then acquired Hokkaido-based security service company Douto-Keibi in 2015 and took a minority stake in parking lot management company CSP Parking Support in 2016. In 2019, KSS listed on the Tokyo Stock Exchange’s Jasdaq section (stock exchange for ventures and small companies). In 2020, KSS entered into a capital and business partnership with Secom (TSE: 9735), the largest security company in Japan and the third largest in the world. Since its founding, KSS has consistently focused on manned security services and does not provide machine security services.

Industry and Business Model

The security market in Japan amounts to JPY3.5tn in revenues, and the two largest players account for 40% of the market with Secom producing JPY1.0tn and Alsok (TSE: 2331) generating JPY470bn in revenues in FY03/21. The remaining 60% of the market consists of hundreds of smaller players.  

Security services in Japan can broadly be divided into the following four categories: 

1) Facility security,

2) Crowd and traffic control,

3) Armored transportation, and

4) Personal security

With the exception of some of the services under facility security, most security services require human labor. Security companies train personnel and dispatch them to customers such as facility administrators or event organizers, earning a part of the protection compensation.  In recent years, KSS has worked to hire more young full-time employees, and is working to retain them by providing better job security and enhancing benefits.

Source: Kenkyo Investing, based on company data

In the security services industry, robotic process automation (RPA) is a trend worth noting, particularly for facility security. The Japanese security market expanded gradually with a CAGR of +1.3% until 2020, with machine security growing +3.3% and manned security growing +0.8%. The market contracted in 2020 owing to lower event security demand following the COVID-19 pandemic.

Source: National Police Agency, Japan Security Systems Association

Looking at KSS, its performance has been generally in line with the overall market. As of 1H FY03/22, the company projected full-year sales and profits to rise substantially YoY aided by special demand related to the Tokyo Olympics.

Source: Kenkyo Investing, based on company data

The company’s operating profit margin has remained relatively stable, hovering around 5-7% in recent years as it is able to flexibly respond to fluctuations in demand by adjusting the number of contract employees it keeps. 

Source: Kenkyo Investing, based on company data

Shareholders

As of the end of September 2021, the company had 1,506,500 shares issued and 57,700 shares in treasury, putting outstanding shares at 1,448,800. Foreign shareholders accounted for approximately 4% of total. Major shareholders are as follows.

Source: Kenkyo Investing, based on company data

Among the major shareholders, @Planning, Max Corporation, K.S.S and K-mac are asset management companies of the founding family, and founder-CEO Fumio Azuma also holds 33,300 shares not included in the table above. Overall, the founding family holds at least 61.5% of outstanding shares.

Secom, the biggest security service company in Japan and the third largest in the world, entered into a capital and business alliance with KSS in May 2020. Custody Bank of Japan and MSIP are trust accounts. Katsumi Abe is KSS’s CFO.

In 2020, the company executed a stock buyback of 75,000 shares (~5% of outstanding shares).  Since its listing, KSS has gradually raised its payout ratio from 30% to 50% in FY03/21, which is the long-term target the CEO advocated when the company listed in 2019.

Financials & valuation

  • Kyoei Security Service (TSE: 7058) is a mid-sized security service company primarily generating revenues by dispatching security officers to facilities, events, and condominiums. 
  • Key challenges for the company include the shifting demand in the security industry from manned security to machine security, and the resulting pressures in expanding manned security services.
  • Key opportunities include the gradual rise in security demand reflecting urbanization and pent-up demand following the COVID-19 pandemic.
  • At JPY3,000 per share, KSS trades at an adjusted EV/EBIT of 4.1x with a market capitalization of JPY4.4bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +5.1% to +13.6%, including shareholder returns, over the next 3-5 years.

With a stable source of revenue, KSS has been operating virtually debt-free and is extremely cash-rich, with cash and deposits of JPY3.5bn out of total assets of JPY5.7bn (as of September 2021). As a result, it maintains a strong balance sheet with an equity ratio of 71.5%.

Some of the challenges the company faces include the risk of a decline in the manned security market as demand for machine security rises. In addition, the company’s fixed cost ratio and break even point may rise owing to a higher ratio of full-time employees, which may in turn pressure profitability.  Especially considering the rise in machine security, the company may need to consider boosting its presence in manned security services that are difficult to replace, such as bodyguard services.

In terms of opportunities, the urbanization trend and the resulting increase in commercial facilities, large-scale condominiums, and office buildings will likely support KSS’s growth. In addition, while the absence of special demand from the Tokyo Olympics may pressure sales and profits going into FY03/23, pent-up demand for events that were canceled or postponed due to the pandemic may come to light as vaccination rates move higher. 

At JPY3,000 per share, KSS trades at an adjusted EV/EBIT of 4.1x with a market capitalization of JPY4.4bn. Assuming a fair value EV/EBIT of 2-4x and stable profits (excluding special demand from Tokyo Olympics), investors can expect an investment CAGR of between +5.1% and +13.6%, including shareholder returns, over the next 3 to 5 years.

The bottom line

Kyoei Security Service is a mid-sized security service company specializing in providing manned security services for facilities, events, and executives/celebrities.  Although the company faces some challenges such as a shift from manned security to machine security and a rise in fixed costs and break even point attributable to its high ratio of full-time employees, it also has tailwinds such as the growing demand in security service aided by urbanization and pent-up event demand following the COVID-19 pandemic. Buying in at JPY3,000 per share, investors can expect an investment CAGR of between +5.1% and +13.6%, including shareholder returns, over the next 3 to 5 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.