Thinking points

  • ITFOR, inc. (TSE: 4743) is a mid-sized IT system vendor primarily specializing in the financial, call center, e-commerce, and logistics sectors. It holds ~70% market share in credit collection systems for individuals.
  • Key challenges for the company include the rise of disruptive fintech  services, which may eat into the retail credit market for banks and hence demand for ITFOR’s services.
  • Key opportunities include the upward trend in cashless payment and e-commerce, especially following the COVID-19 pandemic, as well as expansion of their related products.
  • At JPY780 per share, ITFOR trades at an adjusted EV/EBIT of 3.3x with a market capitalization of JPY23bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -1.2% to +3.8% including shareholder returns, over the next 3-5 years.

Introduction

ITFOR is a system vendor providing system integration and IT consulting services mainly to the financial, call center,  and e-commerce industries, as well as the public sector. The company operates under three segments. In its System Solutions segment, ITFOR provides products for financial institutions, government/municipalities, e-commerce/logistics, and call centers. In its Service Solutions segment, the company provides BPO services mainly for the public sector. Finally, in its Infrastructure segment, ITFOR sells cashless settlement terminals and provides cloud services. 

Source: Kenkyo Investing, based on company data

Business & operating environment

Company History

ITFOR was founded in 1972 after being spun-off from a Japanese  electronics trading company. It has since developed IT systems for financial and logistics clients, while also representing and selling overseas  LAN (local area network) systems, printers, and other IT equipment to the Japanese market. In 1986, the company developed a personal loan credit collection system for banks, which is still one of its main products today. ITFOR went public on the Jasdaq market in 2000, and transferred sections to the First Section of the Tokyo Stock Exchange in 2006.

Industry and Business Model

The  financial IT systems market, the company’s largest target market, has been growing steadily on the back of  “Digital Transformation” initiatives and is expected to grow 1.1% YoY to JPY2.5tn in 2022.  ITFOR’s main product is a personal loan credit collection system, where it boasts a ~70% market share selling mainly to regional banks and nonbanks.

The market for call center systems and e-commerce logistics systems are expected to grow at a 2.9% CAGR and 6.3% CAGR, respectively, from 2019 to 2023. With the looming labor shortage and initiatives to improve service quality, there has been active RPA-related IT investment in the public sector.

The company is an integrated vendor, generating earnings  from system usage and maintenance service fees from clients. Its revenue stream is generally highly stable and recurring in nature as its systems for financial institutions and the public sector are integrated into its clients’ daily operational procedures once implemented. To secure its position and keep its clients, ITFOR needs to regularly update its products and continue investing in employee training and R&D in order to meet the ever-increasing customer system requirements.

Source: Kenkyo Investing, based on company data

ITFOR’s sales have been growing at a 5% CAGR following the global financial crisis up to FY03/21, aided by solid demand for IT system investment. Results have improved dramatically since FY03/20 thanks to the shift to cashless payment systems and growing demand for online sales and logistics fueled by the spread of COVID-19. The company expects FY03/22 sales to grow by 6% as well.

Source: Kenkyo Investing, based on company data

Source: Kenkyo Investing, based on company data

The breakdown of each system and service is shown above.  There has been no major change in product mix, with roughly one third of total revenues coming from systems for the financial sector.

Source: Kenkyo Investing, based on company data

The company’s OPM has been hovering between 10-15%, supported by usage and maintenance fees from its clients. It maintains its investment in training and R&D at roughly 30% of net income, which in turn creates a stable profit and cash-flow structure.

Shareholders

As of the end of September 2021, the company had 29,430,000 shares issued and 1,794,800 shares in treasury, putting outstanding shares at 27,635,200. Foreign shareholders accounted for approximately 10.8% of total. Major shareholders are as follows.

Source: Kenkyo Investing, based on company data

Brother Industries (TSE: 6448) is a Japanese multinational electronics and electrical equipment company, which seems to have a close relationship with ITFOR as they co-developed printers in the year after ITFOR’s founding.  KIA (Kuwait Investment Authority) fund and RBC ISB are well-known funds specializing in value stocks. Kiyoshi Higashikawa is ITFOR’s former chairman.  

ITFOR aims to maintain a shareholder payout ratio of at least 30%, and has paid out 38% to 56% in the last five years.

The company established 626,600 stock options for directors, executive officers and employees in 2017, for takeover defense and rewards purposes.

Financials & valuation

  • ITFOR, inc. (TSE: 4743) is a mid-sized IT system vendor primarily specializing in the financial, call center, e-commerce, and logistics sectors. It holds ~70% market share in credit collection systems for individuals.
  • Key challenges for the company include the rise of disruptive fintech  services, which may eat into the retail credit market for banks and hence demand for ITFOR’s services.
  • Key opportunities include the upward trend in cashless payment and e-commerce, especially following the COVID-19 pandemic, as well as expansion of their related products.
  • At JPY780 per share, ITFOR trades at an adjusted EV/EBIT of 3.3x with a market capitalization of JPY23bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -1.2% to +3.8% including shareholder returns, over the next 3-5 years.

With a stable source of revenue, ITFOR has been operating completely debt-free over the last decade, and is extremely cash-rich, with cash and the equivalents  of JPY11.8bn out of total assets of JPY18.8bn as of December 2021. The company also has JPY2.0bn in cross shareholdings.  As a result, it maintains a strong balance sheet with an equity ratio of 77.9%.

Some of the challenges the company faces include the rise of disruptive alternative services to the company’s core products. ITFOR’s main product is a personal loan credit collection system for banks, but there are some emerging online retail loan platforms offered by fintech companies that are backed by funds in the EU and US. If similar services are brought into Japan and regulations are relaxed, this may negatively affect demand for ITFOR’s product portfolio.

In terms of opportunities, the need for social distancing triggered by COVID-19 has boosted demand for cashless payment and e-commerce, and in turn for systems provided by ITFOR. The remote work trend is likely to continue even after the pandemic comes to a close, and demand for these systems is likely to remain firm.

At JPY780 per share, ITFOR trades at an adjusted EV/EBIT of 3.3x with a market capitalization of JPY23bn. Assuming a fair value EV/EBIT of 2-4x and stable profits, the company trades roughly at fair value, and investors can expect an investment CAGR of between -1.3% and +3.8% including shareholder returns, over the next 3 to 5 years.

The bottom line

ITFOR is a mid-sized IT system vendor specializing in system integration and IT consulting services mainly to the financial, call center,  and e-commerce industries, as well as the public sector.  Although the company faces some challenges such as the rise of disruptive fintech services which may eat into the retail credit market for banks and hence demand for ITFOR’s services, it also has tailwinds such as  the upward trend in cashless payment and e-commerce especially following the COVID-19 pandemic, as well as expansion of ITFOR’s own related products. Buying in at JPY780 per share, investors can expect an investment CAGR of between -1.3% and +3.8%, 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.