|Shares Out. (in M):||12||P/E||15||13|
|Market Cap (in $M):||22,128||P/FCF||15||13|
|Net Debt (in $M):||-5,520||EBIT||2,261||2,498|
Asante is a leading provider of termite services in Japan with approximately 40% market share. Pest and termite control is an excellent business characterized by highly recurring revenue generated from an essential/recession-resistant service with pricing power. Rollins (ROL US), one of the large US-based pest/termite companies, has compounded revenue at 7% and EBIT at 11% over the last 10 years, which has led to a 21% 10-year annualized total stock return. Below is a chart of Rollins (not Asante):
First, it’s important to note that I do not read Japanese and Asante publishes limited English language financials, therefore I have relied on Google Translate to help analyze the company. Asante appears to be a dominant player in a very attractive industry. The company breaks the business down into anti-termite measures (42%), anti-humidity (24%), anti-earthquake (29%) and other (5%) but I believe this is basically a termite company. The company’s financials are impressive and rival cult-like Rollins: revenue has grown in the mid-single digits since 2010, normalized operating margins are in the high-teens and pre-tax normalized ROIC is in the 30% area. The company reported a disappointing 12% EBIT margin in FY 2017 primarily due to an increase in retirement costs. The company forecasts FY 3/2018 EBIT margins of 15.4% as margins normalize. The following Asante financials are in JPY.
Japan’s housing stock is quite unique -- homes are often wooden (around 26 of the 29 million detached homes are wooden, out of 52 million total homes) and have limited lifespans. These two factors differentiate the Japanese termite/pest market. This Freakonomics episode on Japanese housing is informative: http://freakonomics.com/podcast/why-are-japanese-homes-disposable-a-new-freakonomics-radio-podcast-3/. Interestingly, the Japanese government has introduced policies to extend the longevity of the housing stock. To the extent these policies are successful and a home resale market develops, demand for Asante’s services, which help preserve/extend house value, should increase.
Below is the company’s forward forecast through FY 3/2020 which embeds 6-7% revenue growth driven by staff/branch growth and productivity improvements. The forecast also assumes margins expand to 16.6%, which is in-line with the historicals.
I cannot identify any specific catalysts but I think Asante is attractive. This is a very high quality business trading for around 6-7x my estimate of normalized EBIT and 55-75% of my estimate of intrinsic value of around ¥2400-3200 per share. It’s worth noting that my 10x EBIT multiple is a significant discount to Rollins (around 26-30x) and Rentokil (17-18x).
In the interim, the stock currently yields 2.8% (FY 2018 dividend: ¥50) and the company has increased the payout ratio over time. Further, the business should continue to compound intrinsic value for some time.
Normalization of EBIT margin
|Entry||06/08/2017 12:49 PM|
Hi - thanks for the writeup. Can you say a bit more about the increase in retirement costs? 600 bps of margin is alot... did an entire generation of employees leave at once? is there a training cost associated with filling these positions? etc?
also - could you comment on insider ownership?