Asset-light Corporate Housing Management Service Company Trading for 5.7x EV/EBIT

Thinking points

• Sunnexta Goup Inc. is a medium-sized outsourced services provider specializing in corporate housing management and apartment management, with a nationwide franchise network.
• Key challenges for the company include the risk of failing to retain personnel amid a labor crunch and difficulty in creating synergies between corporate housing and apartment management businesses.
• Key opportunities include the stable earnings base from its high contract-retention rate and nationwide franchise network that commands a leading market share in Japan.
• At JPY1,000 per share, Sunnexta trades at an adjusted EV/EBIT of 5.7x with a market capitalization of JPY10.7bn.
• Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -3.8% to +3.4%, including shareholder returns, over the next 3-5 years.

Introduction

Sunnexta operates three segments:

• Corporate housing management: Operated by Japan Corporate Housing Service (JCHS), whose franchisees enter into a corporate housing management contract with clients looking to outsource their corporate housing management. The franchisees then act as the contact point for both landlords and tenants (employees of the lessee), as an agent for the client company. The franchisees also provide administrative services such as introducing leased company housing properties for client company transferees, contracting, conducting move-in procedures, processing rent payment, and estimating restoration costs at the time of move-out; 
• Apartment management: Operated by CLASSITE Inc., which provides facility management services to condominium management associations, with the exception of security services; and
• Incubation: Newly developed business, including a 24-hour call center service, safety confirmation service, and insurance BPO service.

Business & operating environment

Company History

The company’s predecessor, Japan Corporate Housing Service Inc. (JCHS) was established in 1998 as part of a spin off from a real estate company. In the following year, the company began offering outsourced corporate housing management service “Shataku Partner”. Since then, the company gradually expanded its service coverage and listed its shares on the Growth Section of the Tokyo Stock Exchange (TSE) in 2005. In 2007, JCHS entered the condominium management business after acquiring Daiward Inc. (now Classite Inc.). The company transferred to the Second Section of TSE in 2016, the Prime Section in 2019, and was renamed to Sunnexta in 2020.

Industry and Business Model

Corporate housing management is operated by JCHS, whose clients are companies with corporate housing programs to accommodate dormitories or relocations for their employees. Compared to western countries, where employers tend not to intervene in employees’ residence to respect privacy, it is common for Japanese businesses to prepare dormitories or corporate housing for employees. It is offered as part of their benefit program, and the company gets to take advantage of tax benefits in lieu of paying housing allowances while also ensuring  a cohesive workforce. Another factor contributing to this difference is that it is common practice for Japanese companies to relocate personnel. 

Japanese corporate housing system is roughly classified into:

A) Corporate-owned housing, in which employers own the real estate to accommodate their employees and the families collectively, and

B) Rental corporate housing, in which employers rent real estate and re-rent it to their employees. 

Companies have been shifting from corporate-owned houses to rental corporate houses to reduce maintenance costs such as depreciation and to trim down their balance sheets. This trend has accelerated under the pandemic with the aim of avoiding clusters of infections within the company. Accordingly, there is demand for outsourced management services for corporate housing owners, and JCHS is a pioneer in this field. 

Currently, JCHS has over 300 clients consisting mainly of large companies with more than 1,000 employees, covering a variety of industries from financial institutions (banks/insurers) and manufactures to pharmaceutical companies. As of June 2022, JCHS manages 270,000 facilities, commanding a leading 25% market share in Japan. Other major players include Relo Group (TSE: 8876), Taisei Housy (Non-listed), STARTS (TSE: 8850), and Leopalace (TSE: 8848). Combined with JCFS, these 5 companies hold roughly 70% of the Japanese market. 

JCFS specializes in franchising, with around 330 franchisees in total. The company was able to develop a nationwide franchise network by allowing its franchisees (i.e., rental real estate companies) to retain 100% of the brokerage commission paid to them by client companies, and instead only collects franchise royalties from the franchisees.

According to the Housing and Land Survey (2018) by the Ministry of Internal Affairs and Communications, there were 1,100,000 “salary housing” units built by companies, public offices, schools, etc. to house their employees in FY2018. The number of “salary housing” is falling as organizations shift from company-owned housing to rental corporate housing. On the other hand, the stock of private rental housing was 15,295,000 units in FY2018, 1.4 times the number in F1993. The stock of condominiums in FY2019 was 6,655,000 units, an increase of 107,000 units over the previous year with a CAGR of 1.7% over the past decade. 

Considering the tax advantages of offering company housing to employees rather than providing a housing allowance, and the fact that the housing environment for new graduates is a major factor in new employee hiring, demand for rental corporate housing is likely to be strong.

Sunnexta’s revenues are split between corporate housing management and apartment management, and both have increased gradually. 10-year CAGR is +5.4% for corporate housing and +7.0% for apartment management. The company projects +3.4% growth in the total revenues in FY2023.

Sunnexta has produced generally stable profits, with OPM ranging between 9.8% and 11.3% over the last 5 years, underpinned by service fee income from contracts and a high retention rate of around 90%.

Although revenue from corporate housing and apartment management are roughly equivalent, corporate housing accounts for over 80% of total operating profit. The company is aiming to grow by boosting contracts while revamping its earnings structure. 

In FY06/23, the company expects operating profit to drop owing to contract cancellations by some customers as well as the shift toward bringing corporate housing management in-house.

Shareholders

As of the end of June 2022, the company had 10,692,700 shares issued and 1,632,636 shares in treasury, putting outstanding shares at 9,060,064. Foreign shareholders accounted for approximately 6% of total. Major shareholders are as follows. 

Since 2012, Sunnexta has periodically granted stock acquisition rights to its directors and corporate auditors as stock options, with the unexercised portion amounting to 591,800 shares as of June 2022.

Benefit One provides management services for government and corporate employee benefit programs.  All of UH Partners 2, Hikari Tsushin K.K. and SIL K.K. are leading value investors in Japan and subsidiaries of Hikari Tsushin, Inc. (TSE: 9435). Including holdings of its other affiliates, Hikari Tsushin, Inc. virtually held 20.5% of Sunnexta’s outstanding shares as of June 2022. Akihiro Sasa is one of the co-founders and the executive chairman of the company. 

Sunnexta’s shareholder return target is a dividend payout ratio of at least 35% of net income. The company targets a dividend on equity ratio (DOE) of at least 4.0% and a total shareholder return (TSR) of at least 200%. Therefore Sunnexta implemented share-buyback of 350k shares in 2018 and 1,080k shares in 2022, and thus retired the treasury stock of 600k shares in June 2022. In addition, Sunnexta has been increasing the DPS and DOE as follows.

Financials & valuation

• Sunnexta Goup Inc. is a medium-sized outsourced services provider specializing in corporate housing management and apartment management, with a nationwide franchise network.
• Key challenges for the company include the risk of failing to retain personnel amid a labor crunch and difficulty in creating synergies between corporate housing and apartment management businesses.
• Key opportunities include the stable earnings base from its high contract-retention rate and nationwide franchise network that commands a leading market share in Japan.
• At JPY1,000 per share, Sunnexta trades at an adjusted EV/EBIT of 5.7x with a market capitalization of JPY10.7bn.
• Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -3.8% to +3.4%, including shareholder returns, over the next 3-5 years.

Thanks to its stable revenue source and capital-light business model, Sunnexta has been operating completely debt-free since FY2016. Over the past four years, approximately half of EBIT (=JPY400mn p.a.) has been accumulated as cash and net assets, with an equity to asset ratio of over 70%. In FY2022, its cash position jumped to JPY5.6bn from JPY4.0bn owing to the sale of investment securities and affiliated companies. Considering the company advocates for a DOE target of 4%+ and TSR target of 200%+, it is highly likely that it will continue providing returns to shareholders such as through dividend increases or share repurchases. 

Some of the challenges the company faces include the risk of failing to retain personnel in the labor-intensive corporate-housing and apartment management operations amid a labor shortage. In addition, as the corporate housing market shifts to rental corporate houses, some of its previous synergies with its apartment management business is diminishing.

In terms of opportunities, it’s fair to expect the corporate housing system to remain as companies strive to secure talented workers amid a labor shortage. Additionally, Sunnexta will likely maintain its stable income source given its high contract retention rate of 90%+ built on client trust, rising outsourcing demand, and a nationwide network of 330 franchisees.

At JPY1,000 per share, Sunnexta trades at an adjusted EV/EBIT of 5.7x with a market capitalization of JPY10.7bn. Assuming a fair value EV/EBIT of 2-4x and stable cash-flow and shareholder returns, investors can expect an investment CAGR of between -3.8% and +3.4%, including shareholder returns, over the next 3 to 5 years.

The bottom line

Sunnexta Goup Inc. is a medium-sized outsourcing service provider specializing in corporate housing management and apartment management. The company faces some challenges such as the risk failing to retain personnel for its labor-intensive corporate-housing and apartment management operations amid a labor shortage and difficulty in creating synergies between corporate housing management and apartment management businesses. It also has tailwinds such as its stable earnings base driven by its high contract-retention rate and nationwide franchise network commanding a leading market share in Japan. Buying in at JPY1,000 per share, investors can expect an investment CAGR of between -3.8% and +3.4%, including shareholder returns, over the next 3 to 5 years.