Thinking points

  • Harima B.Stem Corp. (TSE: 9780) is a mid-sized building maintenance company that manages office buildings as well as commercial/retail, apartment and PFI/PPP facilities.
  • Key challenges for the company include a shortage of qualified maintenance professionals with certifications and skills, as well as its low profit margins stemming from a labor-intensive and fragmented business environment.
  • Key opportunities include stable corporate earnings underpinned by a balanced business portfolio and market presence (9th largest operator in the Japanese market).
  • At JPY4,485 per share, Harime B Stem trades at an adjusted EV/EBIT of 1.8x with a market capitalization of JPY4.3bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +2.5% to +13.6% including shareholder returns, over the next 3-5 years.

Introduction

Harima B.Stem is an independent building maintenance company offering comprehensive building management services, and is the ninth largest in Japan by revenue. It operates only one segment, providing the following four services:

  • Building management: cleaning, operation and maintenance, security, and front desk services;
  • Apartment management: rent collection, cleaning, maintenance, management association agency, and concierge service;
  • Environmental solution: anti-virus, anti-mold, and energy-saving measures; and
  • PPP/PFI operation: public-private partnership projects.

The company does not provide a breakdown of revenues by service, but discloses revenue by function as shown below:

Source: Kenkyo Investing, based on company data

Business & operating environment

Company History

Harima B was founded in 1961 to sell cement products, but transitioned to the building cleaning business in 1963, changing its name to Harima Building Service. Subsequently in 1966, former president Tomoyoshi Otori joined the company, and Harima began providing condominium management and security services. In 1993, the company changed its name to the current Harima B.Stem Corp. It listed on the TSE Jasdaq (Catalyst market) in 2004, and has spent the last two decades acquiring several small building management companies such as Kyowa Fire Protection Equipment (2000), Fuji Housing (2001), NK Building Management (2006), and Kanto Fire Fighting Equipment (2016).

Industry and Business Model

Harima B primarily operates in the building maintenance industry, which can be categorized into the following segments:

Source: Kenkyo Investing, based on Japan Building Maintenance Association

As shown above, the office and commercial/retail segments are the largest, followed by public facilities such as hospitals and schools.

Due to legal requirements, most operations in this industry require national certification in Japan, leaving the industry considerably labor-intensive with the exception of some automated security services. Therefore, building maintenance companies must retain a large number of qualified personnel in order to secure projects.

Clients in the building maintenance business are typically facility owners, developers, and asset managers, which is why there are many developer subsidiaries in the industry. The largest player in Japan is AEON delight (TSE: 9787), a subsidiary of AEON (TSE: 8267), the largest retailer in Japan, and the second largest is Tokyu Land Corporation HD (TSE: 3289), one of the largest real estate developers in Japan. Harima B comes in around the 9th largest in Japan with a market share of 0.6%. The top five companies have a market share of 20%, making it a relatively fragmented market.

Source: Kenkyo Investing, based on Japan Building Maintenance Association

In terms of market size, the Japanese building maintenance market was about JPY4.2tn in 2020. The market shrunk about 1% YoY, due in part to facility closures caused by COVID-19. However, it is expected to recover by +0.9% YoY and reach pre-pandemic levels in 2021 at JPY4.3tn. In addition, with a CAGR of +2.6% from 2016 to 2021, the demand for building maintenance business is gradually rising, especially in urban areas, aided by an increase in the number and size of office buildings, large commercial facilities, and multi-family housing due to urbanization.

In contrast, the higher demand combined with the shortage of qualified maintenance personnel has created a labor crunch for maintenance work. In a survey of building maintenance companies in Japan conducted by the industrial association, nearly 80% of companies complained about a shortage of human resources as follows:

Shortage in employees77.8%
Aging of employees75.5%
Hike of salaries58.5%
Contract Price Negotiation57.8%
Shortage in on-site managers54.0%
Securing technical experts43.4%
Source: Kenkyo Investing, based on Japan Building Maintenance Association

In terms of business performance, Harima B has been growing since inception generates earnings from a good mix of Operation, Maintenance, and Security, whereas most small and medium-sized building maintenance companies are dependent on cleaning services.

Source: Kenkyo Investing, based on company data

As for earnings, the company has been profitable for over 50 years and has recently been growing earnings through FY03/22. On the other hand, its operating margin is low at 3.6%, an this has averaged at about 2.0% over the past 10 years. This is mainly attributable to the fact that the market is fragmented with many competitors, and the difficulty in differentiating services tends to drive price competition.

Source: Kenkyo Investing, based on company data

Shareholders

As of the end of March 2022, the company had 962,449 shares issued, with 70,535 shares in treasury, putting outstanding shares at 891,914. Foreign shareholders accounted for approximately 1.4% of total.

Major shareholders are as follows.

Source: Kenkyo Investing, based on company data

Yoshihisa Otori is a former president and current chairman of the company, and Otori Co. Ltd. is his individual asset management vehicle. Combined, Yoshihisa owns over 20% of the company’s outstanding shares. With 9.4% of shares held by employees and directors, over 30% of shares are held by people affiliated with the company.

Hikari Tsushin K.K. is a value investor in Japan, and Chuo-Nittochi is a medium-sized real estate developer. The other shareholders are the banks with a business relationship with Harima B.

Financials & valuation

  • Harima B.Stem Corp. is a mid-sized building maintenance company that manages office buildings as well as commercial/retail, apartment and PFI/PPP facilities.
  • Key challenges for the company include a shortage of qualified maintenance professionals with certifications and skills, as well as its low profit margins stemming from a labor-intensive and fragmented business environment.
  • Key opportunities include stable corporate earnings underpinned by a balanced business portfolio and market presence (9th largest operator in the Japanese market).
  • At JPY4,485 per share, Harime B Stem trades at an adjusted EV/EBIT of 1.8x with a market capitalization of JPY4.3bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +2.5% to +13.6% including shareholder returns, over the next 3-5 years.

With a stable source of revenue, Harima has been operating virtually debt-free with deposits of JPY3.9bn against borrowings of JPY1.1bn as of March 2022, maintaining a healthy balance sheet with an equity ratio of 57.7%.

Some of the challenges the company faces include securing qualified human resources with building maintenance certifications. According to the Building Maintenance Information Yearbook 2022 published by the industry association, 77.8% of building maintenance companies in Japan cite the shortage of human resources as their biggest management issue, and the key challenge is in figuring out how to train, acquire, and retain new human resources as the existing workforce ages.

In terms of opportunities, Harima B has a stable and balanced revenue structure in a gradually growing market, with some presence in office buildings as well as commercial/retail, apartment, and PPP/PFI facilities. 

At JPY4,485 per share, Harima B trades at an adjusted EV/EBIT of 1.8x with a market capitalization of JPY4.3bn. Assuming a fair value EV/EBIT of 2-4x and stable profits, investors can expect an investment CAGR of between +2.5% and +13.6%, including shareholder returns, over the next 3 to 5 years.

The bottom line

Harima B.Stem is an independent building maintenance company offering comprehensive building management services for office buildings as well as commercial/retail, apartment and PFI/PPP facilities. Although the company faces some serious challenges such as a shortage of qualified professionals with required certifications for operations, it also has some tailwinds such as its stable revenue structure and growing demand as urbanization drives an increase in the number of facilities needing management. Buying in at JPY4,485 per share, investors can expect an investment CAGR of between +2.5% 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.