Thinking points
- Asahi Intelligence Service (TSE: 9799) is a small system integrator specializing in network services and dispatches network engineers to client offices.
- Key challenges for the company include rapid technological changes in client industries such as the emergence of 5G/IoT and securing talent to keep up with the increasingly diversifying needs of clients while the whole market suffers from a shortage of talent.
- Key opportunities for the company include growing demand for network services, where AIS can offer everything from design and development to operation and maintenance.
- At JPY1,287 per share, AIS trades at an adjusted EV/EBIT of 1.6x with a market capitalization of JPY10bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +4.7% to +13.9%, including shareholder returns, over the next 3-5 years.
Introduction
Asahi Intelligence Service Co., ltd. (“AIS”) is a small system integrator specializing in network service. The company operates three segments:
- Network service: Development, operation and management of open servers and network systems, help desk and fault handling;
- System Development: Design and development of business systems, embedded software development and verification, ERP (business packages) and other software development; and
- System Operation: Implementation and maintenance of systems.
In general, the IT network business includes the following:
Design: By interviewing clients, AIS finds out what the client is looking for and defines the requirements for the network and determines the network equipment and circuits to be used;
Development: Based on the requirements definition, AIS configures the network lines and equipment. Network development may take several months:
Operation and maintenance: After testing the network system, AIS operates the network system, including changing and updating equipment settings and configurations; and
Monitoring: AIS Identifies the cause of any malfunctions or problems that occur in the network system and takes action, such as replacing equipment as needed, to support smooth operation.
Business & operating environment
Company History
The company was founded in 1962 in Osaka by Youshi Otsuki for the purpose of selling printing machines and offering direct mail agency services. In 1966, the company introduced IBM-made input machines and began data entry operations. AIS shifted to data entry operations in 1968 and began providing on-site data entry services. The company began offering system development services in 1985, then system operation services in 1986. In 1997, the company started providing network services, which is its core business today. It listed on Tokyo Stock Exchange in 2001.
Industry and Business Model
The strength of AIS lies in its IT network business, where it develops and operates client company networks by dispatching engineers.
As network service contracts tend to span multiple years, this offers network service companies earnings stability.
On the other hand, network service businesses are manpower-intensive, as they often involve keeping engineers stationed at client offices to design, build, manage, and maintain the network systems. In addition, the level of service required by clients is ever-evolving. For example, AIS must keep its engineers updated on the latest technologies such as 5G and network virtualization, while continuously recruiting new talent.
According to IDC Japan, the Japanese IT infrastructure services market is expected to reach JPY2.05tn in 2026, with a +3.2% CAGR between 2021 and 2026.
The Design & Development segment will maintain steady growth overall, with a projected CAGR of 2.5% from 2021 to 2026, supported by the firm demand for remote work and digital transformation initiatives.
The Operation & Maintenance segment is forecasted to grow by 3.3% per year, with the continuing demand for cloud computing, VDI, and DaaS, as well as the high demand for total outsourcing of increasingly complex IT infrastructure environments.
In terms of business performance, AIS saw a sharp drop in sales in FY03/10 following the 2008-2009 financial crisis due to a drop in corporate IT investment. However, sales have since expanded for 12 consecutive years. By segment, the mainstay network services has grown at a +5.8% CAGR. Even during the onset of the COVID-19 pandemic in 2020, sales grew on the back of high demand for building remote work and e-commerce environments.
Profits also continued to rise thanks to a stable pipeline of new contracts. The company’s profitability also improved, with operating profit margin rising from +2.5% in FY03/10 to +9.6% in FY03/22.
Shareholders
As of end-March 2022, the company had 8,264,850 shares issued, with 492,387 shares in treasury, putting outstanding shares at 7,772,463. Foreign shareholders accounted for approximately 3.38%. Major shareholders are as follows.
Sachiko, Takeshi, Takeyasu and Koji Otsuki are the founder’s family members. Hikari Tsushin K.K. is a value investor in Japan.
The company has been gradually raising its dividend payouts, from a DPS of JPY30 in FY03/09 to JPY43 in FY03/22, including a commemorative dividend of JPY3. The company’s dividend payout ratio has floated around 36-38% for the last five years. There are no options outstanding, and AIS has not conducted any material share repurchases recently.
Financials & valuation
- Asahi Intelligence Service (TSE: 9799) is a small system integrator specializing in network services and dispatches network engineers to client offices.
- Key challenges for the company include rapid technological changes in client industries such as the emergence of 5G/IoT and securing talent to keep up with the increasingly diversifying needs of clients while the whole market suffers from a shortage of talent.
- Key opportunities for the company include growing demand for network services, where AIS can offer everything from design and development to operation and maintenance.
- At JPY1,287 per share, AIS trades at an adjusted EV/EBIT of 1.6x with a market capitalization of JPY10bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +4.7% to +13.9%, including shareholder returns, over the next 3-5 years.
With a stable source of revenue, AIS has been operating virtually debt-free, with JPY260mn in interest-bearing debt compared to JPY7,981mn in cash and equivalents of 7,981mn. As of March 2022, the company had an equity-to-asset ratio of 78.9% and a current ratio of 3.62x.
Some of the challenges the company faces include securing IT talent. According to a 2019 survey conducted by Japan’s Ministry of Economy, Trade, and Industry (METI), there is a chronic shortage of IT personnel in Japan, and the gap in supply and demand is expected to grow from 220,000 people in 2018 to 450,000 by 2030. This poses a challenge for AIS to retain talent and keep pace with industry growth.
In terms of opportunities, demand for network development, the company’s core business, is projected to remain firm for the foreseeable future thanks to corporate digitization.
At JPY 1,287 per share, Asahi Intelligence Service trades at an adjusted EV/EBIT of 1.6x with a market capitalization of JPY10bn. Assuming that sales and EBIT grow at a conservative CAGR with a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of between +4.7% and +13.9% including shareholder returns, over the next 3 to 5 years. One important factor for investors to keep in mind is that the EV calculation includes strategic cross-shareholdings of JPY1.4bn, which the company may retain for a long period to maintain business relationships.
The bottom line
Asahi Intelligence Service is a small system integrator specializing in network service, mainly dispatching engineers to client offices. Although the company faces some serious challenges such as rapid technological changes in client industries, including the emergence of 5G/IoT technologies, diversification of client needs, and securing talent in an increasingly competitive environment, it also has some tailwinds such as the growing demand for IT network service, where AIS can offer everything from design and development to operation and maintenance. Buying in at JPY1,287 per share, investors can expect an investment CAGR of between +4.7% and +13.9%, including shareholder returns, over the next 3 to 5 years.
