Thinking points
- Computer Management (TSE: 4491) is a small IT developer mainly operating in western Japan, with a wide range of clients especially in finance and healthcare.
- Key challenges for the company include the continuous recruitment and training of IT personnel needed for growth, and the succession of the 78-year-old founder and president.
- Key opportunities include stable corporate earnings supported by long-term customer base and room for growth backed by strong IT infrastructure investment demand.
- At JPY2,953 per share, CMK trades at an adjusted EV/EBIT of 1.4x with a market capitalization of JPY3bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +5.9% to +17.9% including shareholder returns, over the next 3-5 years.
Introduction
Computer Management (hereinafter referred to as CMK) is a small IT integrator specializing in IT infrastructure development and ERP solutions. The company operates under three segments:
- General Solution Service: Provides services mainly in contract development, operation and maintenance for end-users, domestic IT manufacturers and major system integrators;
- Infrastructure Solution Service: Focuses on a series of services related to AWS (Amazon Web Services), including development of server, network, and database as well as operation & maintenance; and
- ERP Solution Service: Provides a comprehensive one-stop service for SAP’s ERP package, ranging from implementation support, add-on development, maintenance & operation, and BPO service operations.
Business & operating environment
Company History
CMK was founded in 1981 in Osaka by the current president, Katsuaki Takenaka, as a spin-out of CSK Corporation (now SCSK (TSE: 9719)) to develop office work software. The company opened its first branch office in Tokyo in 1984, and then gradually increased its presence throughout Japan. In 2012, the company acquired a competitor, NOCS Corporation. CMK was listed on the JASDAQ Standard section of the Tokyo Stock Exchange in 2020 and moved to the Standard section in 2022.
Industry and Business Model
According to IDC Japan’s estimation in June 2022, the domestic IT infrastructure market amounted to JPY1.76tn in 2021, and is expected to grow to JPY2.05tn in 2026, with a CAGR of +3.2%. The development sector (CAGR +2.5%) will be driven by the acceleration of remote work and digital transformation initiatives, while the operation and maintenance sector (CAGR +3.3%) will continue to be driven by demand for cloud computing, Virtual Desktop Infrastructure (VDI), and Desktop as a Service (DaaS).
By industry, pandemic recovery has been slow in the distribution, manufacturing, and tourism industries due to supply chain disruptions, but IT investment is beginning to normalize. In the financial and healthcare sectors where CMK excels, growth is expected to continue as before. In particular, the financial IT systems market, which is the company’s largest target market, has been expanding steadily on the back of Digital Transformation initiatives and is expected to grow 1.1% YoY to JPY2.5tn in 2022.
For IT infrastructure development, the company expects recurring revenues from post-development operation and maintenance, and for ERP solutions, it provides a series of market-leading SAP products to both SMEs and large corporations. In fact, over 50% of the company’s revenue is recurring, and 64% of revenues come from long-time clients with over 10 years of history. This provides for considerable stability in the company’s business performance..
Source: Kenkyo Investing, based on company data
Supported by the business environment and business model described above, CMK has achieved stable growth in the last five years. It posted a 3-year CAGR of 5.4%, with substantial growth in the infrastructure sector (the breakdown: General: +4.4%, Infrastructure: +12.9%, ERP: 1.7%). Even during the pandemic, the company showed stable growth, driven by demand for building remote work infrastructures. It expects to deliver further +7.8% revenue growth in FY03/23.
In terms of operating profit, CMK’s OPM has risen incrementally from 4.7% in FY03/19 to 7.7% in FY03/22, mainly owing to the expansion of high-profit projects by lump-sum contract, increased transactions with end-users, and ongoing efforts to streamline operations and control company-wide expenses.
Shareholders
As of the end of March 2022, the company had 1,016,000 shares issued, with 80 shares in treasury, putting outstanding shares at 1,015,920. Foreign shareholders accounted for approximately 1.64% of total. Major shareholders are as follows.
CMK Ltd. is the asset management company of the founder and president, Katsuaki Takenaka. Both Hideyuki and Toshiyuki Takenaka are sons of him, meaning that the founding family controls at least 41.6% of the company. UH Partners 2 is the value investment entity of HIKARI TSUSHIN, INC (TSE: 9435). Okasan and SBI securities are major online securities brokers in Japan. The relationship between the other shareholders and the company is unknown.
There are currently no options outstanding as 600 stock options were exercised in October 2021.
Although the company does not specify a target shareholder return policy, the dividend payout ratio has generally been around 15% (= approx. 20% of EBIT).
Financials & valuation
- Computer Management (CMK) is a small IT developer mainly operating in western Japan, with a wide range of clients especially in finance and healthcare.
- Key challenges for the company include the continuous recruitment and training of IT personnel needed for growth, and the succession of the 78-year-old founder and president.
- Key opportunities include stable corporate earnings supported by long-term customer base and room for growth backed by strong IT infrastructure investment demand.
- At JPY2,953 per share, CMK trades at an adjusted EV/EBIT of 1.4x with a market capitalization of JPY3bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +5.9% to +17.9% including shareholder returns, over the next 3-5 years.
On the back of the relatively stable demand for its services, CMK has been operating completely debt-free for years, and is extremely cash-rich. Cash and equivalents account for JPY2.5bn of its total assets of JPY4.0bn as of March 2022. As a result, the company maintains a strong balance sheet with an equity ratio of 65%.
Some challenges the company faces include ongoing IT staffing and on-the-job training costs. According to a study by Mizuho Research & Technologies in 2018, commissioned by the Ministry of Economy, Trade and Industry, there will be a shortage of 790,000 IT personnel in Japan by 2030. CMK’s IT infrastructure development services are labor-intensive, and it will need to continuously secure talent to expand its business in the future. In addition, finding a successor for the current president Katsuaki Takenaka, who has led CMK for over 40 years since its founding, is another challenge. Mr. Takenaka is now 79 years old, and his son Hideyuki Takenaka (Director in Infrastructure System), is expected to replace him in the near future, and the founder’s departure may diminish some of the company’s cohesive strength.
In terms of opportunities, as the overall IT infrastructure market expands, the company expects to expand its business by further solidifying its strong customer base and providing competitive products and services.
At JPY2,953 per share, CMK trades at an adjusted EV/EBIT of 1.4x with a market capitalization of JPY3bn. Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of between +5.9% and +17.9%, including shareholder returns, over the next 3 to 5 years.
The bottom line
Computer Management (CMK) is a small IT developer specializing in IT infrastructure development and ERP solutions. The company has been growing steadily on the back of a wide range of clients, with 64% of revenues coming from long-time customers of over 10 years. Although the company faces some challenges such as the lack of IT personnel needed for business growth and succession issues for the founder and president, it also has tailwinds such as its stable revenue sources and strong demand for IT infrastructure development. Buying in at JPY2,953 per share, investors can expect an investment CAGR of between +5.9% and +17.9%, including shareholder returns, over the next 3 to 5 years.
