Author Topic: 4659 JP - Ajis Co Ltd  (Read 8032 times)

MrB

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4659 JP - Ajis Co Ltd
« on: October 18, 2010, 05:23:32 PM »
Contribution to celebrate the new board. Actually its more like a small token payback for all the lurking over the years!!
Apologies for the formatting.


Company:   Ajis Co Ltd (4659 JP)
Expected Timeframe:   Two years and beyond
Asset Class:   Common Equity   Country:   Japan
Recommendation:   Long   Situation:   Deep Value
Return:   Not available       
Thesis
Ajis (All Japan Inventory Services) Co Ltd is the largest inventory services company in Japan and also claims to be the largest in Asia. The company derives the majority of its business from Japan, but has been expanding across Asia and have offices in Korea, Taiwan, Malaysia and China.
In Japan Ajis customers include 70 of the top 100 retailers, total over 2,000 and include companies like Seiyu (Japanese Wal-Mart subsidiary), Seven Eleven, Adidas, Giorgio Armani, Gap, Coach, Zara, etc. Sales are generated pretty evenly across a broad range of industries, namely supermarkets, general merchandise stores, book stores, hardware stores, convenience stores and drug stores.

It has 76.6% market share in Japan and is the market leader in Korea. Ajis has 95 sales offices in Japan, which are spread pretty evenly across the whole country. In China it has an office in both Dalian and Shanghai, in Korea it has offices in Seoul, Busan and Daejeon. Lastly it has one office each in Malaysia and Taiwan. In Japan the potential market is estimated to be 5 times current company sales (based on US sales, adjusted for the comparative size of the economies).

The company's services consist mainly of physical stock take, but it also provides supplementary inventory services i.e. inventory replenishment and runs a temporary staffing business through which it runs mystery shopper programs, conducts customer surveys and supplies cashiers to the retail industry. The staffing business might strike you as a distraction, but is actually a creative and effective way to effeciently manage a highly variable work force; more on this later. Anyway, the focus should be on physical inventory services where 89% of sales are generated.

History
In 1978 Ajis acquired technology from Muscolino, which is an American company and is still in operation today under the ownership of Phyle Inventory Services (www.picsinv.com) Ajis listed on the OTC in 1996 and has been a steady grower as far back as I can see.

Business model

Ajis is mainly a stocktaking business and generates 99% of its stocktaking revenues from direct sales and 1% from royalty income from three franchises (Kyushu, Shikoku and Hokkaido). The temporary staffing business’ goal is to optimize use of the workforce and together with several other initiatives a ultimately focused on reducing SG&A (selling general and admin) expenses and increasing the share of variable costs. This makes more sense when you consider that Ajis has only 330 permanent employees compared to the more than 4,000 temporary workers at peak times and less than 1,000 during quiet periods. Also when you consider that more than 2/3 of Ajis’ costs are staffing costs then you appreciate that it is important to optimize this cost line. If a company can do it well then it naturally affords it a competitive advantage. One way of doing this is to deploy workers into other similarly skilled activities like mystery shopping, inventory replenishment, customer surveys, etc during quite times. On the side I wish to note that apparently the president and other senior executive management will help out with stock taking in extremely busy times.

Another initiative is proper systems and facilities to quickly train staff in order to deploy them effectively, which is mainly done at a purpose built facility (mockups of stores etc) at its head office, and for what it’s worth the company will tell you it is the largest such facility in Japan. I am much more excited by the company's claims of a well designed compensation system that runs from management, all the way down to the person counting the stock; in the last financial year a minimum of 30% of total compensation for the average employee was in the form of a bonus. The system seems to work for the permanent employees at least if one can rely on the 9.2 years of average length of employment as being a good indicator. So not only does Ajis have a highly variable workforce, it has a highly variable compensation structure to go with it and in my view that makes for a significant advantage. Also, let’s not forget that this has been achieved in the Japanese labor market, which is notoriously inflexible.
 
Furthermore, the company has been developing propriety technology over the years that it keeps on improving, but more importantly it is constantly working on reducing the threat of emerging technologies. The latter has slowly been improving over the years, especially in the smaller convenience store sector, where the competition has been increasing according to management.

Lastly, the company has been working for almost a decade on moving customers onto stock taking cycles throughout the year, rather than the traditional once or twice a year stock takes. The advantages of this in terms of the variable workforce are obvious.

The numbers
The proof is in the pudding, so to speak, and management has been able to drive down SG&A expense gradually over the years; I wish I came across more management's that can produce numbers like these.
Year   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010
SGA/Revenues   25%   22%   20%   17%   15%   14%   14%   13%   7%   9%   8%   7%   7%
 

These initiatives by management are succeeding in driving down costs. This also reflects the company's economies of scale, which together with the fact that it’s the only national operator (important for large retail and other chains) make for the biggest crocodiles in its moat.
Gross margin has been weakening slightly over the last decade from about 28% to 26% and net margin has been flat due to several non cash charges that I feel are distorting the real story to some extent (cash is king).
The growth story has also been fairly robust with sales per share growing by 16% per annum over the last decade, although incremental growth has been slowing.

Ultimately it comes down to the cash and free cash flow has been steadily growing in step with operating earnings. I say operating earnings, because net earnings are distorted by several items e.g. allowance for doubtful accounts, exchange losses, etc. Free cash flow averaged ¥525m over the last decade and also shows up in the net cash balance (due to retained cash), which has increased from ¥208m in 2000 to ¥3,260m in 2010. Shareholders have been seeing more of this cash in the form of dividend payments that steadily increased from ¥50m ten years ago to ¥220m in 2010 for a current historical GROSS dividend yield of 3.7%; payout ratio roughly 20%. There has been virtually no stock buybacks over the years until 2006 from which time shares have been reduced by between 1% and 3% per annum. There are now 9.5% fewer shares outstanding compared to 2006. In terms of value returned to shareholders the dividend and buy backs over the last 5 years totaled ¥2,288m which just about equals the current enterprise value of Ajis and is nearly half the current market value.

ROE averaged 19% over the last decade despite a sizable net cash balance, which now makes up 44% of market value. 19% is admirable for any company, let alone a Japanese one and this is all before stripping out the sizeable net cash.
Management has a significant stake in the company and with insiders own 47% of the company. The Saito family controls almost all of the insiders' shares.

The valuation
When looking through the rear view mirror, we see this company has, over the last 10 years, grown sales by 12.5% per annum, sales per share by 16%, EPS by 17.6% and book value per share by 16%. Margins have for the most part been either flat or improving, ROE averaged 19% and net cash makes up 44% of market cap. Compared to 10 years ago sales are ¥12Bn more, net income ¥900m more while equity increased by ¥6Bn. So I think it is safe to say on economic value add the company is an above average company.
With a market share north of 70% and the only company operating nationally it has a superior moat.
Management is clearly more than competent, good capital allocators and in a country where the institutional imperative is markedly different to that in the West; especially when it comes to capital allocation. To boot, management has a significant stake in Ajis.
Currently Ajis' market value is ¥5,842m and it has net cash of ¥3,235 for an enterprise value of ¥2,607m and 2010 (March) net earnings were ¥1,147m and LTM net earnings ¥1,113m. I consider a historical PE of 5.2 and EV/NI of 2.3 to be adequate compensation for the risk of investing in Ajis. Current gross DY is 3.7%

Historical trading multiples
Ajis averaged a P/BV of 2.7 over the last decade and a P/S of 0.86 and this compares favorably with the current multiples of 0.84 and 0.32 respectively.

Relative value
No peer group to compare

Variant View (So what worries me about this company?)

a) It’s a Japanese company and the financial press will tell you, with that comes concerns about currency risk, economic risk and other macro factors.
Granted; the currency issue is tricky, but since the USD is my starting point and since I prefer working assets over dormant assets e.g. gold I feel more comfortable taking on the currency issue at the right price. Japan and therefore its currency face significant headwinds, but compared to the USD I cannot make a clear case for one currency being significantly sounder than the other.
In the case of Ajis there is significant and in my view sufficient risk, priced in, to compensate for this currency risk.
Economic risk is real and if you read the latest AR then you will note that Ajis' sales are materially impacted due to the extremely competitive nature of its customers’ business. For example, retail margins are thin and an economic downturn forces cost cutting and one of the first things convenience stores will do is it will cut back on stock take. Owners/employees will stay a bit later and do it themselves, but the situation will reverse itself when the economy picks up. Also, on the staffing side the lower skilled nature of the job means an immediate increase in the supply of say, cashiers in a weakening economy; the result is less demand for Ajis’ staffing business. This also begs the question whether Ajis’ business is cyclical? Possibly; maybe company sales versus the potential market was just small enough in previous downturns to grow straight through those downturns, but now it could be maturing and are therefore more effected by an economic downturn. I don’t think I can come to any reliable conclusion on this, so I want it priced in and I would argue that if it’s not priced in at an EV/NI of 2.3 then at what multiple is it priced in?
I consider other macro factors irrelevant to this discussion.
A factor that is very important, but is hardly ever discussed and a point missed by the majority of value investors in Japan are what I would simply sometimes refer to as “pocket risk”. As an investor I want to see money in my pocket over the long term. This comes in three forms; some kind of cash/value return, share price appreciation or both. Although, I have never made a proper study of this, I sense that I have come across more managements in Asia compared to other geographies that seem to accumulate cash, simply to sit on it. With these managements return on equity is a foreign concept and shareholder interests certainly not a watchword; a tonne of these have been Japanese company managements. Therefore I generally insist that a company has American style ROE’s and some talk or walk of realizing shareholder value. In this case the ROE is definitely not a problem and the share buybacks and dividend yield will ensure that the value in Ajis will be transferred over time to its shareholders’ pockets and not get trapped in the company. So if dividends were cut back and buy backs suspended then it will be red flags. This might already be happening, because whereas buybacks and dividends totaled ¥859m in 2009 it came to only ¥301m in 2010. An amber flag was certainly raised by the company’s recent actions to ward off any takeover attempts.
b) Management has been trying to make inroads into foreign markets, in particular Korea. My assessment is that the successes on this front have been nothing to write home about. However, one is not paying for potential foreign growth at this price.
c) Technological risk from things like RFID chips is real, but my assessment is that it will still take many years to play out and I don't see how it will render the services of Ajis obsolete overnight, because I am not convinced that some of the advantages that these technologies bring will not be a plus to companies like Ajis. Stock taking companies embraced bar code technology and is starting to adopt RFID technology too; it is not as if the technology is passing them by. Wall-Mart is a leader in the adoption of the technology and yet there it is, still using Ajis’ services. At the current valuation I do think one is properly rewarded for taking on this risk.
d) Competitive pressures. The main competitive pressures seem to be driven more by a combination of economic pressures, technological development and inventory practices at retailers rather than from other stock taking companies. Management is keeping a keen eye on low cost retailers, because that is the first point where new practices and technologies that are threatening Ajis’ competitive advantage can be identified. The most encouraging factor in this case is that management UNDERSTANDS that the way to stock taking nirvana is to be the lowest cost and most efficient provider to the retailer. It has to maintain the advantage and constantly communicate its advantages to its customers. It shows in management’s communication to shareholders and it clearly shows in the SGA line; this is pivotal.
f) 543k of treasury shares has not been cancelled; Non issue for me.
g) A recent 170% increase in long term liabilities to ¥363m is for the construction of a second office building…new offices are always a flag for me. However, in fairness it should be noted that on the previous round management chose to use an abandoned supermarket building as its HQ.

Please find the trading statistics and valuation multiples below.


Trading Statistics (millions except for per share values)        
Stock Price   ¥1,210.00   Debt    ¥290
Price target   ¥2,500.00   Minority Interest   ¥0
% premium / (discount) to target   -51.60%   Enterprise value   ¥2,633
Shares outstanding - diluted   4.8   Annual Dividend per Share   ¥45.00
Market Cap    ¥5,808   % yield   3.70%
Cash + short-term investments    ¥3,465   Projected 2010 EPS growth %   0.00%

Valuation Multiples   Data   Multiple   Valuation Multiples   Data   Multiple
P /                                   EV /
EPS LTM   ¥228.00   5.3x   Sales LTM   ¥18,212   0.1x
EPS 10E   ¥233.00   5.2     Sales 10E   ¥18,358   0.1 
EPS 11E   ¥232.00   5.2     Sales 11E   ¥18,300   0.1 
                    
EV /                                                    P /
EBITDA LTM   ¥2,760            1.0    Book value   ¥6,628   0.9x
EBITDA 10E   ¥2,752            1.0    Credit Statistics
EBITDA 11E   ¥2,750            1.0    Net debt / EBITDA LTM   (1.2x)
FCF LTM   ¥693            3.8    Total debt / EBITDA LTM   0.1 
FCF 10E   ¥504            5.2    Cash / share   721.87
FCF 11E   ¥900            2.9    Market cap / Debt   20.0x





rmitz

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Re: 4659 JP - Ajis Co Ltd
« Reply #1 on: October 18, 2010, 07:25:23 PM »
Nice, thank you for the report.  I'm wondering where you go for researching Japanese stocks?  I haven't attempted any research in that area so far.

twacowfca

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Re: 4659 JP - Ajis Co Ltd
« Reply #2 on: October 18, 2010, 08:06:28 PM »
Thanks MrB.  Have been thinking about Ajis since it was posted on VIC a few months ago.  Thanks for your interesting additional details.  This would be a steal were it not a Japanese Co.  Recently, Jim Grant said in an interview that he had help set up a fund in about 1999 to invest in Japanese net nets.  Their investments have gone nowhere for 11 years, except for dividends received because of the culture that discourages activism and returning value to shareholders.  Are there good reasons why Ajis will be an exception to this?

MrB

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Re: 4659 JP - Ajis Co Ltd
« Reply #3 on: October 19, 2010, 03:05:09 AM »
Bloomberg, Capital IQ and Thomson Reuters are all good places to start and if you don't have access to those then I will start with people that have proven track records. Read Orbis' reports http://www.orbisfunds.com to get a feel and appreciate the fact that its a tough place to make money. Orbis compounded by 5% or so since 1998. Certainly take a look at what people like Kyle Bass have to say. Maybe do the latter first, which will save you the trouble of ever going near Japan ;D
Anyway that's a start and feel free to ask more questions or for alternative ideas if you don't have access to the above.

MrB

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Re: 4659 JP - Ajis Co Ltd
« Reply #4 on: October 19, 2010, 03:20:57 AM »
I cannot speak for Grant, because I don't know the details of what he did and I say this because I know some investors who executed a net-net strategy in Japan very successfully around the same time.
You make a very good point though and that is why firstly, I want a company to be efficient by western standards (min 8% ROE incl cash) and secondly be shareholder friendly i.e. good DY, share buybacks etc. Ajis do both, but can be more aggressive in buying back shares. It's also the latter point, which get most foreign investors in Japan in trouble I believe. In Japan the odds are that the value will sit in the company and will never be transferred to your pocket (the "pocket risk" I referred to). So these net-net strategies are usually filled by a ton of low ROE, high cash holding companies that never pay a dividend and never buy back shares and why should they? There is no penalty, culturally or financially; its the Japanese way.

So I would say that is what sets Ajis apart, but a lack of a return of value to shareholders, together with the following are the main factors that will turn Ajis into a mistake;
-currency (assuming you are unhedged)
-technology



turar

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Re: 4659 JP - Ajis Co Ltd
« Reply #5 on: October 19, 2010, 01:26:23 PM »
Is there a way to look at insider trading for Ajis or other Japanese stocks?

Also, how are you reading their financial reports? Google translation doesn't quite pull the trick.
« Last Edit: October 19, 2010, 01:41:42 PM by turar »

MrB

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Re: 4659 JP - Ajis Co Ltd
« Reply #6 on: October 20, 2010, 03:23:10 AM »
Always start as close to the source as possible. So in this case I will try filings on the Jasdaq and the company's website. Look for a "proxy" statement.
For free translation try using Zoho viewer in Chrome.

Baoxiaodao

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Re: 4659 JP - Ajis Co Ltd
« Reply #7 on: October 20, 2010, 09:48:54 AM »
I like the idea. Thank you Mr.B.

It is remarkable that those Japanese can turn a good business into a mundane one by just hoarding cash. There are a lot more companies with excellent economics in Japan, but I never put a penny into them. Think about it this way. The whole system or culture is against investors. If it does not change, there is no way you can make money from those companies. If it does change, you can still make plenty of money even though the P/E has gone from 2 times to 4 times.

I'd rather to wait.

sr_ryan

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Re: 4659 JP - Ajis Co Ltd
« Reply #8 on: January 27, 2011, 11:20:12 PM »
Is anyone still following this thread?

MrB

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Re: 4659 JP - Ajis Co Ltd
« Reply #9 on: January 30, 2011, 07:29:23 AM »
sr_ryan
I get notified of any postings, so let me know if you have any questions. Been out of the office a bit, but generally I will reply fairly quickly.