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CAC Holdings Corporation (JP-4725) Tokyo Stock Exchange First Section ( II )

2018-12-04  提供機構:FISCO  作者:FISCO  點閱次數:2

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◆Results trends

The financial base is solid and the FY12/18 results are trending within the initially expected range

1. Issues were clarified in the previous medium-term management strategy period

Looking at how the Company’s results trended during the period of the previous medium-term management strategy (FY12/15 to FY12/17), net sales grew by only 2% a year, and in this situation, operating profit declined for three consecutive periods and the results for flow earnings were poor.

Looking at net sales and the profit margin by service, it can be said that first, the problems were clearly the slump in sales in the domestic IT business and the recording of unexpected losses in the overseas IT business.

During the period of the previous medium-term management strategy, within BPO/BTO services (former reportable segment), the CRO business (new reportable segment) accounted for more than 90% of sales. Therefore, there is no problem in thinking that adding systems operation and management services (former reportable segment) to systems development and integration services (former reportable segment) is basically the same as “the domestic IT business + the overseas IT business” (new reportable segments).

Through making subsidiaries of AFL in 2014 and Sierra in 2015, net sales in the overseas IT business grew to a scale of ¥10bn, from which it is clear that sales in the domestic IT business slumped. On the other hand, between 2015 and 2017, AFL recorded losses of approximately ¥3bn (including extraordinary losses), which included an allowance for doubtful accounts and an impairment loss on goodwill, business infrastructure improvement expenses, a loss on the sale of a subsidiary, and an increase in SG&A expenses. Sierra also incurred a loss of more than ¥500mn due to unprofitable major projects in 2017.

In the context of these issues, going forward it will be necessary to pay attention to how the Company responds to the domestic factors. But for the overseas business, AFL has already completed a round of business structural reforms, and for Sierra also, the transfer of all shares was completed in December 2017.

As a result, in the overseas IT business, segment income, which was a loss of ¥224mn in FY12/18 1Q, became income of ¥38mn in 2Q on a quarterly basis, and the effects of the Company’s responses are already starting to appear.

Looking at the trends in net sales and the profit margin in the BPO/BTO services business (former reportable segments; in recent years, the CRO business has contributed more than 90% of the net sales in this business), we see that on the one hand, while experiencing some slight plateaus, the scale of the CRO business has been steadily expanding, but on the other hand, it has become apparent that the major fluctuations in the profit margin is an issue.

It has been noted that the main reason for the major fluctuations in the profit margin is the occurrence of unprofitable projects caused by the form of the contract with pharmaceutical companies.

This is because in the Company’s mainstay operations of pharmacovigilance (collecting and accumulating information on pharmaceuticals’ side effects and making applications), it is extremely difficult to accurately predict the occurrence of side effects, so there is no choice but to deploy ample human resources at peak times, and so unprofitable projects frequently occur.

Through negotiations with the pharmaceutical companies, the Company is shifting the contract form from payments that vary according to the volume of operations, to a method in which a variable amount is added to a fixed, basic amount according to the volume of operations. Although there may be a view that this is too late and the damage has already been done, it can be said to show that the Company is responding to a fundamental issue in the CRO business, and when combined with the improved productivity through the utilization of ICT, we think it is highly likely that it will improve profitability and stabilize profits.

2. Has a solid financial base, while the focus is also on its large holdings of Recruit shares

Looking at the trends in the representative indicators of the stability of the financial structure, we see each are being maintained at a sound level. Specifically, the equity ratio at the end of FY12/14 was 54.3%→58.6% at the end of FY12/17, the current ratio was 257.8% at the end of FY12/14 →216.6% at the end of FY12/17, and net cash (cash and deposits minus interest-bearing debt, plus shows cash in excess) was ¥3,133mn at the end of FY12/14 →¥4,080mn at the end of FY12/17.

What we should focus on here is that, in a situation of the recording of continuous gains on the sales of securities due to the rise in the prices of shares, including of Recruit Holdings <6098> (below, Recruit), the value of the Company’s investment securities, which forms its non-current assets, has greatly increased.

The value of the Recruit shares held by the Company is ¥14,868mn (end of FY12/17), which accounts for the majority of its total balance of investment securities (¥20,788mn). Holding a large volume of Recruit shares, which have high market liquidity (highly convertible) and a low acquisition book value, has the effect of greatly increasing the current ratio and net cash in actual terms. This holding of shares with high market liquidity can be said to support the Company’s flexible financial strategy.

3. The FY12/18 results trended within the initially expected range

In the FY12/18 1H consolidated results, net sales decreased 9.7% YoY to ¥25,440mn and operating profit increased 31.6% to ¥534mn.

The rates of progress were low toward achieving the full fiscal year forecasts, of net sales of ¥54,000mn (up 1.4% YoY) and operating profit of ¥1,600mn (up 129.1%). However, the Company has projects for trust banks that are scheduled to be recorded as sales in 4Q, so the results up to 1H are within the initially expected range.

Looking at the indicators of financial stability at the end of June 2018, the equity ratio was 58.6% and the current ratio was 205.6%, so both are being maintained at sound levels. Also, net cash was ¥4,980mn and the valuation of investment securities was ¥22,248mn, both of which were higher amounts than at the end of FY12/17.

◆Strengths and issues

Greatest strength is its “transformational power”

1. Strengths are its “corporate culture,” “customer base,” and “financial structure” that support its “transformational power”

What is apparent on considering the Company’s history, business description, and results trends, is that its greatest strength is its “transformational power,” which is its ability to transform itself (corporate reforms) according to societal needs and issues that change with the times.

It is not content with growing as an independent, specialist software company, and recently it has evolved to become an IT & healthcare services company, while interweaving “business structural reforms through selection and concentration” with “business expansion through M&A.”

The aspects supporting this “transformational power” are “a corporate culture of positively taking on challenges (management’s intention),” “an excellent customer base as the core of business expansion,” and “a solid financial structure that makes possible a flexible financial strategy.”

Naturally, “taking on challenges” is a method, and we estimate that it is precisely because the Company has a clear mission and purpose (a management philosophy), of being “customer oriented and emphasizing CSV,” that a corporate culture has taken root within it that is based on “taking on challenges” that is necessary to achieve its goals.

Also, the fact that the Company launched an overseas IT business in advance of its industry peers and developed the CRO business to be one of its two pillars of earnings can be said to be a benefit of the good relations with its “excellent customer base” that it has built as Japan’s first independent SIer. In other words, its “excellent customer base” creates the seeds for “taking on challenges.”

It is the Company’s “solid financial structure” that supports its M&A strategy, rapid business structural reforms, and stable returns to shareholders. The reason why it has held a large amount of Recruit shares up to the present time is likely because Recruit is an important business partner, but the Company also has a track record of selling its Recruit shares as necessary. On this point also, the Company benefits from its good relationships with customers.

2. Issues tend to occur as the reverse side of strengths

On using a Why Tree analysis to search for the factors behind the slump in the Company’s profits, it becomes apparent that 1) “taking on challenges,” which should have been a method, ended up becoming a purpose, such as that the due diligence and PMI that form the basis of an M&A were insufficient due to the excessive pursuit of sales expansion in overseas markets, and 2) because its customer base is excellent and relations with customers are good, it was too slow in implementing measures that it should have taken much earlier.

◆Business outlook

Refining the medium-term management strategy it is focusing on

As a priority issue for the management team, the Company has been working to refine Determination 21, which is the new medium-term management strategy with FY12/18 as its first fiscal year.

In this medium-term management strategy, the Company sets out various measures, including 1) improving the earnings power of existing businesses, 2) creating and expanding new business domains, and 3) strengthening and revitalizing the Group. The strategy also indicates the numerical targets for its final fiscal year (FY12/21), of net sales of ¥70bn and operating profit of ¥4bn.

This refining work, which is currently ongoing, is being progressed based on thorough discussions in the Board of Directors, and there is the feeling that there may even be a far reaching review of the initial plan.

When presenting the strategy’s content, it seems highly likely that it will create an action plan that further incorporates measures for “improving the earnings power of existing businesses.”

Specifically, we will be paying attention to whether or not it includes the following points; 1) Measures to acquire new customers in the domestic IT business, 2) measures to further raise the gross margin at the time of ordering in the domestic IT business, 3) measures to keep down unprofitable projects, 4) measures to promote the development of local markets in the overseas IT business, 5) measure to increase sales and improve productivity in the CRO business, 6) setting targets for medium-term cost reductions, and 7) setting KPI for these measures and presenting a process chart for them.

Furthermore, we also hope that the lessons learned from the past M&A successes and failures will be formalized within the Company. In an M&A strategy, “the ability to select,” “the ability to be selected,” “and the ability to fully utilize” are crucial, and these should be backed by a company’s core competencies. In the case of the Company, which has many strengths, it is considered that it is able to formalize them independently.

◆Shareholder returns

Management’s intentions can be felt in the recent dividend policy

The Company cites “achieving a balance between investment for growth and stably returning profits to shareholders” as its financial strategy.

In fact, on looking at dividend payments from 2000 onwards, we see that it has reduced the dividend only once, in FY12/17, which was following the payment of a commemorative dividend on the 50th anniversary of its foundation, and that even in FY12/17, in which profits declined greatly, the dividend reduction was still only half (a reduction of ¥4 per share) of the commemorative dividend (¥8 per share).

For the FY12/18 forecast, the Company has announced that it will increase the dividend per share by ¥2, even though profit attributable to owners of parent is expected to be unchanged YoY.

On this point, when considering that it continuously paid a dividend of ¥32 from 2009 to 2015, and from a dividend policy in which it has increased (or is scheduled to increase) the dividend in two of the most three recent fiscal periods, we can feel the strength of management’s intentions, in which it continuously has returning profits to shareholders in mind.

◆Update

Ordinary profit increased 105.5% in FY12/18 3Q, and the CRO business contributed to results

CAC Holdings <4725> announced its FY12/18 3Q (January to September, 2018) consolidated results on November 9th. Net sales decreased 7.2% year-on-year (YoY) to ¥37,394mn, operating profit increased 84.6% to ¥881mn, ordinary profit rose 105.5% to ¥811mn, and profit attributable to owners of parent declined 32.9% to ¥468mn.

In this 3Q, net sales decreased due to factors including the decline in sales in the overseas IT business, mainly from the effects of the removal from the scope of consolidation of the two overseas subsidiaries that were sold in the previous fiscal year alongside the rebuilding of the overseas business, and also the decline in sales in the domestic IT business. However, profits increased greatly despite the impact of the decline in sales, including from the improvement in the profitability of the CRO business.

In the domestic IT business, net sales declined 3.2% YoY to ¥21,689mn, including due to the decreases in hardware sales to large customers and sales to financial institutions. Segment income fell 24.8% to ¥537mn, mainly because of the impact of the lower sales.

In the overseas IT business, net sales decreased 22.5% YoY to ¥7,455mn, including from the effects of the rebuilding of this business in the previous fiscal year and the decline in sales from the Indian and U.S. subsidiaries. Segment income was a loss of ¥226mn (a loss of ¥365mn in the same period in the previous fiscal year), primarily from the effects of the business restructuring.

In the CRO business, net sales trended at around the same level as in the same period in the previous fiscal year, decreasing 0.2% YoY to ¥8,250mn. Segment income increased 344.0% to ¥570mn, mainly because of the elimination of low-profit projects and the reduction in costs.

The initial forecasts for the FY12/18 full year consolidated results have been left unchanged, which are for net sales to increase 1.4% YoY to ¥54,000mn, operating profit to rise 129.1% to ¥1,600mn, ordinary profit to climb 108.9% to ¥1,500mn, and profit attributable to owners of the parent to decrease 0.0% to ¥1,100mn.

 

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