Thinking points
- SYS Holdings (TSE: 3988) is an IT software vendor specializing in softwares and solutions for banks, utilities, automakers, and manufacturers, with recent growth achieved through aggressive M&A and human resource development
- Key challenges for the company include its ability to continuously secure IT talent as the whole industry suffers from a talent shortage
- Key opportunities include expansion opportunities for services and business areas through M&A and overseas business, which the company has carried out over decades
- At JPY577 per share, SYS trades at an adjusted EV/EBIT of 2.8x with a market capitalization of JPY3bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -1.6% to +10.8% including shareholder returns, over the next 3-5 years.
Introduction
SYS Holdings (hereinafter, “SYS”) is a IT software vendor specializing in softwares and solutions for banks, utilities, automakers, and manufacturers. The company runs a single-segment operation which can be broken down and categorized into Global-Manufacturing Solution (GM Solution), Social Information Infrastructure Solution (SII Solution), and Mobile Solution. In GM Solution, SYS provides IT software and services for global manufacturers such as automakers, heavy industry, machinery tool makers, and steelmakers. In SII Solution, the company develops IT systems and infrastructure for financial institutions and utilities such as electricity and gas. Finally, in Mobile Solution, SYS develops customer and employee management apps through wholly-owned subsidiary ESUKEI Co.,Ltd., mainly for the logistics and healthcare industries.
Business & operating environment
Company History
S.Y.system, the predecessor of SYS, was founded in Nagoya city in 1991 by Mr. Hironori Suzuki, the current CEO, and Mr. Tetstuya Yasuda, ex-board director. The company opened branches in Tokyo (2002), Osaka and Shanghai (2004), Vietnam (2011), and Indonesia (2012). In 2011, it launched SYI Co., Ltd., which specializes in IT solutions for the financial industry. Since 2012, SYS has adopted an M&A growth strategy and acquired 10 small system integrators, then established. SYS Holdings in 2013 to manage its subsidiaries. The company was listed on Tokyo Stock Exchange (JASDAQ) in 2017.
Industry and Business Model
SYS develops IT software and systems and sells them to clients. The company specializes in the automobile, heavy industry, machine tools, steel, and transport machinery industries, as well as utilities such as electric and gas. It also services the financial sector and develops and verifies in-vehicle ECUs (Electronic Control Unit).
Domestic investment in automobile software has accelerated on the back of the digitization trend over the last decade, growing from JPY65bn in 2010 to JPY155bn in 2020. This growth trajectory is expected to continue globally through 2030, especially for areas like driving safety and information systems as shown in the table below.
Outlook for Global Automobile-ECU Market (JPY bn)
Meanwhile, software investment in other machinery and utility industries expanded in the 2010s with CAGRs of 4.8% and 15.8% respectively. The manufacturing industry is expected to continue to invest in systems for RPA and digital transformation (DX) purposes, with an expected CAGR of approx. 15% by 2030 from JPY97bn in 2019 to JPY450bn in 2030.
Similarly, the financial IT systems market, the company’s largest target market, has been growing steadily on the back of “Digital Transformation (DX)” initiatives and is expected to grow 1.1% YoY to JPY2.5tn in 2022.
Riding this trend of market expansion, SYS has steadily expanded its business performance. Its revenues have increased significantly from JPY3.7bn in FY07/15 to JPY6.3bn in FY07/21. The breakdown below shows that revenue was mostly split halfway between GM Solution and SII Solution in FY07/15, while GM Solution accounted for 42% and SII Solution accounted for 55% in FY07/21, indicating faster growth in businesses targeting financial institutions and electricity and gas utilities.
The operating profit margin has been stable at 4~6%, except for in FY07/15. The net margins have also hovered around 3~4% owing to limited interest expense and goodwill amortization. As a growing system integrator, the company needs to secure system development talent. As such, the company has expanded its workforce by 1.5 times from 604 in FY07/15 to 912 in FY07/21, with personnel expenses rising as it proceeds with business expansion. SYS focuses on organic HR development for the purpose of improving service quality and optimizing personnel costs, and experienced professionals are being acquired only as a part of its M&A deals. Thus, SYS has consistently maintained its operating profit margin by stabilizing personnel costs, which account for a large portion of its fixed costs.
Shareholders
As of March 2022, the company had 5,197,266 shares issued and 16,000 treasury shares, putting outstanding shares at 5,181,266. Foreign shareholders accounted for approximately 0.4% of total. Major shareholders after the stock-split are as follows.
Mr. Suzuki and Yasuda are the founders of the company. Seto Shinkin and Hyakugo are both local banks located near Nagoya, where the company is headquartered. The company conducted a share repurchase of 8,000 shares in Sep 2021, and issued 13,709 new shares as stock options for its directors.
The company does not have a dividend target, but its payout ratio has historically been around 10-15%.
Financials & valuation
- SYS Holdings (TSE: 3988) is an IT software vendor specializing in softwares and solutions for banks, utilities, automakers, and manufacturers, with recent growth achieved through aggressive M&A and human resource development
- Key challenges for the company include its ability to continuously secure IT talent as the whole industry suffers from a talent shortage
- Key opportunities include expansion opportunities for services and business areas through M&A and overseas business, which the company has carried out over decades
- At JPY577 per share, SYS trades at an adjusted EV/EBIT of 2.8x with a market capitalization of JPY3bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -1.6% to +10.8% including shareholder returns, over the next 3-5 years.
With a stable source of revenue, SYS has been operating virtually debt-free, holding interest-bearing debt of JPY550mn against cash/equivalents of JPY2,505mn. Net cash equivalents comes out to JPY688mn as of March 2022. As a result, it maintains a strong balance sheet with an equity ratio of 56% and a current ratio of 2.3x.
Some of the challenges the company faces include its ability to secure IT talent. According to the METI’s survey in 2019, there is a chronic shortage of IT personnel in Japan, and the supply-demand gap is expected to grow from 220,000 in 2018 to 450,000 by 2030, which will make it difficult for SYS to retain talent and continue growing its workforce alongside business expansion.
In terms of opportunities, investors can expect the overseas business and M&A strategy to continuously contribute to the expansion of SYS’s business domain. The company is highly experienced in small IT integrator acquisitions and post merger integrations, and will likely continue its stable and flexible M&A strategy.
At JPY577 per share, SYS trades at an adjusted EV/EBIT of 2.8x with a market capitalization of JPY3bn. 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 -1.6% and +10.8%, including shareholder returns, over the next 3 to 5 years. The upper end of valuation assumes sales and EBIT growth at 8.8% CAGR, equivalent to historical profit growth. Lower end assumes FY07/22 sales and EBIT continue through FY07/25. Assuming FY07/22 payout ratio of 14% for both cases.
The bottom line
SYS is a small IT software and system vendor specializing in banks, utilities, automakers, and manufacturers. The company’s growth strategy is characterized by M&A and talent development. Although the company faces some challenges such as securing IT personnel amid an industry-wide talent shortage, it also has tailwinds such as expanding its services and business areas through M&A deals and overseas business. Buying in at JPY577 per share, investors can expect an investment CAGR of between -1.6% and +10.8%, including shareholder returns, over the next 3 to 5 years.
