Thinking points
- Japan Reliance Service Corporation (RSC) is a medium-sized security service company primarily providing security services for commercial facilities and offices, building maintenance services, and human resource services.
- Key challenges for the company include personnel shortages and the need to provide continuous training, as well as the performance of parent company Sunshine City, which the company is highly exposed to.
- Key opportunities include the gradual rise in demand for security services reflecting urbanization and pent-up demand following the COVID-19 pandemic.
- At JPY476 per share, RSC trades at an adjusted EV/EBIT of 1.4x with a market capitalization of JPY1.4bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +1.6% to +8.3%, including shareholder returns, over the next 3-5 years.
Introduction
Japan Reliance Service Corporation (RSC) is a medium-sized building maintenance company under the Sunshine City Group, which operates the Sunshine City.
Sunshine City is a large commercial facility comprising several leisure facilities including an aquarium, an observatory, an indoor theme park, a shopping mall, a hotel, and office spaces, located in Ikebukuro, one of Tokyo’s biggest commercial and entertainment districts.
Headquartered there, RSC mainly provides maintenance and security services for commercial facilities and offices such as Sunshine City, as well as human resource services. The company used to offer nursing care services, but withdrew from the business in June 2021.
Business & operating environment
Company History
RSC was founded in 1971 as a building maintenance company, and started providing security and maintenance services for Sunshine City when it opened in 1978. It launched its human resource service in 1981, and expanded its area of operations to Fukuoka, Nagoya and Osaka in the 1970s and 1980s.
In 1997, RSC was listed on the Standard Section of the Tokyo Stock Exchange. The company started offering nursing care services and opened nursing homes near Sunshine City, but eventually withdrew from the business in 2021 after deciding to streamline its business portfolio.
Industry and Business Model
The security market in Japan amounts to JPY3.5tn in revenues, and the two largest players account for 40% of the market with Secom (TSE: 9735) producing JPY1.0tn and Alsok (TSE: 2331) generating JPY470bn in revenues in FY03/21. The remaining 60% of the market consists of hundreds of smaller players.
Security services in Japan can broadly be divided into the following four categories:
1) Facility security,
2) Crowd and traffic control,
3) Armored transportation, and
4) Personal security
With the exception of some of the services under facility security, most security services require manpower. Security companies train people and dispatch them to customers such as facility administrators or event organizers.
Although the the security market in Japan had gradually expanded since the global financial crisis, it was shrunk in 2020 and 2021 due to the COVID-19 pandemic.
RSC suffered a major setback after the 2009 financial crisis, when demand for facility security fell, but then gradually recovered and stabilized in the 2010s. Sales in the Building Maintenance segment dropped from FY03/22 onward due to the COVID-19 pandemic, while the HR Service segment saw a slight increase in sales. As a result, over sales fell slightly by about 3%.
In terms of profits, OPM has been stagnant at 1~3% in the 2010s, but the company suffered losses in FY03/17 owing to higher training costs. Subsequently, RSC managed to reduce costs and lift OPM to 3.4% in FY03/21, and further improved this to 3.8% in FY03/22 despite the drop in sales as it withdrew from the unprofitable nursing care business.
Its largest client has been its parent Sunshine City Corporation, which accounts for 16% of annual sales.
Shareholders
As of the end of March 2022, the company had 2,940,000 shares issued and 65,420 shares in treasury, putting outstanding shares at 2,874,580. Foreign shareholders accounted for approximately 1.8% of total. Major shareholders are as follows.
Sunshine City Corporation. is an operating company of SunshineCity, where RSC is headquartered. Mitsubishi Estate (TSE: 8802) is the biggest real estate developer in Japan, and owns 63.2% of Sunshine City, making it a consolidated subsididary.
TOC (TSE: 8841) is also RSC’s client, which owns and leases office buildings, commercial buildings, exhibition halls, etc. Toho Facility is the building maintenance subsidiary of Toho (TSE: 9602), which is engaged in the production, distribution and exhibition of movies and plays. Kyowa Nissei is an engineering company for gas facilities and construction equipment, and has a business relationship with RSC. Takara & Co. provides IR support and disclosure services.
Mr. Hiroo Kanai has been the representative director and president of RSC since 2013.
Financials & valuation
- Japan Reliance Service Corporation (RSC) is a medium-sized security service company primarily providing security services for commercial facilities and offices, building maintenance services, and human resource services.
- Key challenges for the company include personnel shortages and the need to provide continuous training, as well as the performance of parent company Sunshine City, which the company is highly exposed to.
- Key opportunities include the gradual rise in demand for security services reflecting urbanization and pent-up demand following the COVID-19 pandemic.
- At JPY476 per share, RSC trades at an adjusted EV/EBIT of 1.4x with a market capitalization of JPY1.4bn.
- Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of +1.6% to +8.3%, including shareholder returns, over the next 3-5 years.
With a stable source of revenue and conservative investments, RSC has been operating virtually debt-free with interest-bearing debt of JPY470mn and cash & equivalents of JPY1,668mn as of June 2022. The company’s interest coverage ratio was 95x as of FY03/22, and thus there is little concern in terms of their financial health.
Some of the challenges the company faces include the risk of a personnel shortage due to the need for providing continuous training, as well as a deterioration in business performance at parent company Sunshine City. As a result of the COVID-19 pandemic, revenue at Sunshine City Corporation fell from JPY28,122mn in FY03/19 to JPY24,810mn in FY03/22, with OPM slipping from 24.7% to 18.1%. If the sluggish performance at Sunshine City continues, this may affect RSC’s security services.
In terms of opportunities, the trend toward urbanization and the resulting increase in commercial facilities, large-scale condominiums, and office buildings will likely support RSC’s growth. Backing from Mitsubishi Estate, the largest real-estate developer in Japan and the parent company of Sunshine City Corporation, is also a tailwind.
At JPY476 per share, RSC trades at an adjusted EV/EBIT of 1.4x with a market capitalization of JPY1.4bn. Assuming a fair value EV/EBIT of 2-4x and stable profits, investors can expect an investment CAGR of between +1.6% and +8.3%, including shareholder returns, over the next 3 to 5 years.
The bottom line
Japan Reliance Service Corporation is a building security company under the Sunshine City Group (affiliated with Mitsubishi Estate), specializing in comprehensive building security services and human resource services. Although the company faces some challenges such as securing human resources, the need for continuous training, and its dependence on parent company Sunshine City, it also has tailwinds such as the growing demand in security service aided by urbanization and pent-up event demand following the COVID-19 pandemic. Buying in at JPY476 per share, investors can expect an investment CAGR of between +1.6% and +8.3%, including shareholder returns, over the next 3 to 5 years.
