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Trust Tech Inc. (JP-2154) Tokyo Stock Exchange First Section ( II )

2018-10-29  提供機構:FISCO  作者:FISCO  點閱次數:3

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Increase in engineers is the biggest growth driver, aiming for 10,000 engineers and 15% operating margin with support from higher prices and IT business expansion

2. Mid-term growth strategy in the engineering field

As growth strategy in the engineering field, the Company wants to sustain high growth and improve profitability through concentrated investment of business resources with positioning as the main source of group growth.

In this context, the Company presents three specific tactical investment areas – 1) increased hiring in all areas (new university graduates, mid-career, and overseas), 2) utilization of AI and RPA to enhance engineer value and tasks, and 3) new acquisitions. Numerical goals are 10,000 active engineers and 15% operating margin.

(1) Number of engineers

We think clear correlation exists on a quarterly basis between the number of engineers at period-end and sales when comparing growth rates with the previous quarter. In other words, the number of engineers is the primary driver of income growth in the engineering field. The Company’s initiative to expand hiring as a specific growth strategy measure in the engineering field hence is very convincing.

The goal for increase in employees noted below suggests that the Company is targeting an average annual personnel growth rate of about 20%. We estimate from this that it envisions 20-25% average sales growth as well.

While the mid-term goal for engineers is 10,000 people, near-term focus is the target of 6,600 people at end-June 2019, an addition of about 1,400 people versus 5,209 people at end-June 2018. The Company intends to reach the target through expanded hiring of both new university graduates and mid-career engineers. In mid-career hiring, it started efforts to expand hiring from 1H FY6/19 and is engaged in hiring activities at 20-30% more than the previous pace. It already increased hiring staff and other related personnel to carry this out. In new university graduates, the Company plans to hire 700 people on a combined basis at Trust Tech and the two engineering group companies (Trust Next Solutions and Trust iPowers). Nevertheless, new university graduates enter the firm in April 2019 and hence contribute to income from period-end timing. This means actual contributions are likely to start from FY6/20.

(2) Price perspective

The Company hopes to reach 15% operating margin in profitability*. Increase in dispatching prices is an important factor. There are two main aspects to pricing. One is rising prices driven by supply-demand conditions. This is currently happening. Customers are roughly divided into cost-push and demand-pull categories, though they share extremely strong demand for engineers. We cannot say conclusively whether these conditions will last. However, it is possible to make adjustments to prolong this situation by broadening business areas as explained below.

* This is the average value for parent operating margin at the three engineering companies, including Trust Tech, and does not necessarily match operating margin for the field.

The other is an initiative of best matching with customer needs and pricing that the Company already performs through understanding and assessment of individual engineer skills and the value of these skills in the market. Despite tightness in the engineer dispatching market, opportunities to raise prices are limited, such as when the dispatch destination changes. Matching is an effort to maximize the price increase effect at that time. Substantial improvement room still exists because this takes some time.

Meanwhile, the Company intends to reflect higher pricing in better payment terms for employees too. Expansion of the number of engineers is vital to the growth strategy, as explained earlier. The Company is putting effort into creation of a win-win relationship between itself and employees in order to steadily implement this strategy. An important theme of the latest mid-term business plan is provision of a more favorable environment, including pay, to employees.

(3) Business areas

In areas, we expect IT and software expansion to continue serving as a major driver. The IT and software area was also a theme in the previous mid-term plan, and these efforts are enabling the Company to increase related sales to the ¥10bn range targeted in FY6/19 (combined sales from Trust Next Solutions and Trust iPowers that handle IT and software business). While Trust Tech itself caters to companies in the manufacturing industry (mainly the automotive industry), IT and software work is the fastest growing area in the automotive industry as seen in automated driving and connected cars. The Company wants to promptly double IT and software sales at the two subsidiaries and parent company.

The Company completed operations to support this initiative during FY6/18. FUSIONi, which it acquired as a subsidiary in March 2017, had strengths in SI service, software development, and system maintenance and operation. In January 2018, the Company merged group SI-related business with FUSIONi and renamed the combined entity as Trust iPowers. Additionally, Freedom Co., Ltd., which was acquired as a subsidiary in July 2015, covers development and design assistance for control software (embedded software), and the Company merged it with related subsidiaries and renamed the combined entity as Trust Next Solutions in April 2018. The three companies in the engineering field, including Trust Tech, are targeting fulfillment of the group’s growth goal by expanding their own scope through utilization of unique capabilities and strengths and also collaborating appropriately as a group.

Targeting 10% sales growth via increase in manufacturing staff volume and additions to dispatching customers and 5% operating margin by bolstering “region-centric” initiatives

3. Mid-term growth strategy in the manufacturing field

The Company’s growth strategy in the manufacturing field seeks steady expansion of business scope while sus­taining industry top-class profitability with operating margin* in the 5% range.

* EBITDA margin and operating margin are similar for this segment.

As numerical goals, it calls for annual sales growth at about 10% in growth potential and keeping operating margin in the 5% range in profitability*.

* Operating margin at manufacturing business firm TTM.

The Company hopes to achieve the growth goal of 10% annually through increase in the number of manufacturing staff and expansion of destinations. It previously had 2,000 to 2,500 people, but wants to raise the range to 2,500 to 3,000 people.

The Company has a two-pronged strategy of new university graduate and mid-career hiring, similar to the engi­neering field. It has accelerated the pace of mid-career hiring in 1H FY6/19, as noted earlier, and intends to hire 200 new university graduates to join in April 2019. These efforts aim to raise the number of manufacturing employees to 2,900 people at end-FY6/19, an increase of more than 400 people from 2,466 people a year ago.

While pricing is moving upward in the manufacturing field, it is difficult to factor in higher pricing as part of the growth strategy. This is why the plan adopts measures to boost the staff volume range as already explained. Yet it is also necessary to arrange dispatching destinations to absorb the increase. We think adding to the number of dispatch destination companies is more realistic than raising the number of dispatched employees per location. The Company is already strengthening its initiatives in this area. Demand is strong in engineering and manufacturing fields, but management senses differences in relative strength and weakness among individual companies. More attention will be given to increases in dispatch destination companies than previously, including as a risk hedge.

We expect the Company to “reinforce region-centric hiring and sales,” just as it has done up to now, to achieve the profitability goal of sustaining operating margin in the 5% range. Improvement in expenses efficiency is likely to account for a large portion of securing profitability due to difficulty of anticipating continuous, stable price increase, as mentioned above.

We expect the Company to increase sales and hiring locations as a specific measure in “reinforcing region-centric hiring and sales.” For hiring, it has been bolstering Internet recruitment and operates five real-world Job Park sites. It also focused on dispatch destinations, including an aim of risk distribution, as noted earlier. The Company strength­ened these activities in the previous mid-term plan period. We thus think its operational skill has risen considerably. “Reinforcing region-centric hiring and sales,” meanwhile, still has substantial growth potential (improvement leeway). From this perspective, we believe the Company is capable of expanding sales and sustaining profit margin.

Seeks further expansion with emphasis on earnings underpinned by the UK business that has grown to ¥30bn.

4. Mid-term growth strategy in the overseas field

In the overseas field, acquisitions are the core growth strategy in developed countries with mature markets. The Company aims to pursue opportunities in other countries and regions underpinned by the UK business that has grown to ¥30bn. A key point, however, is “emphasis on earnings” as a prerequisite.

In Asia, which has immature markets, meanwhile, the Company ramped up businesses on its own (establishing subsidiaries and joint ventures). It puts strong focus on earnings, similar to developed countries, in the mid-term plan based on “stage transition from laying seeds to sprouting.”

The Company acquired UK-based Quattro Group as a subsidiary in August 2018, following its purchase of GAP as a subsidiary in December 2017. Use of GAP as the direct buyer in the Quattro Group acquisition takes into account synergies. GAP and Quattro both mainly cater to the food products industry, though with regional separation in western and eastern parts of the country.

This acquisition applies the same scheme and post-acquisition management model as the two preceding cases. Its framework aims to ensure purpose alignment with an earn-out arrangement for the acquisition price (the amount changes depending on earnings) and retention of existing executives as shareholders and management by not purchasing 100% of the equity.

It remains unclear at this point how the stance of “emphasis on earnings” will affect acquisitions and potential differences with past cases. Since the three UK companies are all profitable, this might mean that the Company intends to target opportunities with larger profits or higher profit margins. There is also a possibility of targeting companies with engineering businesses, as in Japan. We will wait to see the next steps.

In Asia, almost all companies have attained profitability at the single-month level and multiple companies are profitable in period income as well. The one remaining one is the joint venture in Guangzhou that began business in January 2018. However, we expect this company to achieve profitability in the near future by following the same path as the Shandong-based joint venture since it uses the same model. While we think the Company is likely to focus on expansion of business scope and income at existing Asian entities, rather than increasing the number of companies, for the time being, it might still establish a new joint venture depending on the counterpart.

Focus on employing people with disabilities, actively assists disabled people

5. ESG initiatives

The Company explained what (where) it is targeting at the start of the mid-term plan announcement. Essentially we think it wants to be a “good company.” ESG and stewardship are commonly heard terms recently. We believe these concepts similarly target cultivation of “good companies.” The Company is pursuing efforts that are correct and achieve growth.

Points reviewed earlier in the report dealt with initiatives aimed at growth. Provision of jobs and assistance to people with disabilities is an initiative as a “good company.” The Company’s subsidiary Trust Tech With Inc. employs disabled people. Trust Tech With makes flower arrangements with a staff of about 60 disabled people. Group companies use these flowers as interior decorations, at various events, and as presents for visitors.

◆Business outlook

Forecast to have significant gains in sales and profit due to M&A effects in overseas field and sales gains in technological field

• Overview of the FY6/19 outlook

Trust Tech projects significantly increased sales and profits, with net sales at ¥82,000mn (up 25.5% YoY), operating profit at ¥6,000mn (up 39.6%), ordinary profit at ¥5,900mn (up 39.5%), profit attributable to owners of parent at ¥3,700mn (up 44.0%) , and EBITDA at ¥7,048 mn (up 32.3%) in FY6/19.

Relative weight of 1H and 2H earnings is a key point in the FY6/19 outlook. The Company’s earnings normally have a 50:50 balance, but skew toward 2H with a 40:60 split in FY6/19. This difference stems from robust investment in 1H for site and personnel reinforcement measures in domestic engineering and manufacturing fields and advertising for mid-career hiring. While profit growth is likely to slow in 1H because of this spending, the Company expects stronger profit thanks to the sales increase effect from more dispatched people in 2H and a roughly 40% YoY gain in FY6/19 profit.

Below we review trends by business segments.

In the engineering field, the plan targets ¥41,230mn in net sales (+22.8% YoY) and ¥5,873mn EBITDA (+33.6%). While the sales increase effect from more mid-career hiring during the period (particularly in 1H) is likely to be the primary source of profit gains, as explained above, we expect improved pricing to provide a boost of about 5% again, similar to the previous year. We will be closely watching the extent of expansion particularly in IT and software areas, in addition to existing strength in automotive industry business, during FY6/19.

In the manufacturing field, the plan targets ¥11,000mn in net sales (+11.1% YoY) and ¥562mn EBITDA (+4.9%). While EBITDA margin drops to 5.1%, it remains in the 5% range, the Company’s goal. This year focuses on personnel expansion, just as in the engineering field, with a target of 2,900 people at the end of June 2019, including new university graduates. Key points are securing dispatching customers to absorb additional personnel and progress with hiring.

In the overseas field, the plan targets ¥29,830mn in net sales (+35.7% YoY) and ¥731mn EBITDA (+53.6%). GAP, which was acquired in December 2017 and contributed nine months to FY6/18, will make a full-year contribution in FY6/19 and thereby provide an extra three months to sales. Furthermore, Quattro Group, which was acquired in August 2018, will boost sales with nine months of its results. There might also be a sales increase effect from shift to new transactions during FY6/19 at MTrec, following completion of contracts with some major customers. In light of these factors, we think sales could surpass ¥30,000mn.

In EBITDA, acquisition costs should offer a net ¥160mn lift to earnings based on decline in GAP-related costs (about ¥230mn) and new Quattro costs (¥70mn). Other profit additions include Quattro earnings and goodwill depreciation costs, GAP’s full-year contributions, improved MTrec profit, and increased profits at Asian companies. We think the Company is likely to attain its EBITDA target.

◆Shareholder returns

In FY6/19, plans to increase the dividend by ¥15 YoY to ¥70. Dividend increase for the seventh consecutive year

Trust Tech sees shareholder returns as an important management issue and is mainly focusing on dividends. It places emphasis on stability in setting the dividend value, but also intends to have the dividend reflect earnings while securing internal retention in order to fund expansion of business scope and improvements in the income structure.

The Company paid a ¥55 dividend in FY6/18 (¥20 interim, ¥35 period-end), a ¥10 YoY hike, as expected. This put the dividend payout at 42.8%. In FY6/19, the dividend outlook calls for a ¥15 increase to ¥70 (¥30 interim, ¥40 period-end), paying a 40.1% ratio based on the EPS estimate.

While the dividend payout ratio has been declining annually compared to the past level, we believe the Company’s dividend results demonstrate strong awareness of shareholder compensation in light of dividend hikes in seven straight years (after adjusting for share splits), upcoming growth investments with overseas acquisitions and additions to domestic personnel, and three share splits in the past eight years.

 

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