2168.T - Pasona Group

[MattR]

Pasona Group (2168.T), a leading staff company in Japan has a 50% stake in another public company Benefit One (2412.T). The market cap of Benefit One is ¥ 448,08B , while Pasona Group has a market cap of just ¥ 84,05B. While the core business of Pasona is stagnating, it is still profitable. As a result Pasona offers more than 60% discount and should trade 266% higher based on it's Benefit One stake alone. The CEO Mr.Nambu promised in 2016 that he would return more money to the shareholder, yet the value gap has increased even more. Even tho it is not clear when the price of Pasona shares will approach it's fair value, it offers considerable upside with a big downside protection.

Pasona Group

Founded in 1976 by current CEO Yasuyuki Nambu to enable housewives reentering the workfoce, Pasona Group is one of the leading staffing companies Japan. In 2003 it shifted towards a pure holding company structure, but still has a remaining core business. Nambu has written several books and has a blog where he posts about his social activism on the Awaji Island project to make it more prosperus. Due to this project the business has suffered, but he promised to concentrate more on profitability in 2016.

Pasona offers temporary staffing, where they mainly work with seniors and housewives, outsourcing, contracting and recruiting services and occupational education and trading. Additonally it provides child-care, nursing and welfare related businesses and a regional revival business to help revitalize local businesses.

Pasona is one of the biggest staffing companies in terms of sales, yet it's market cap is categorized as small-cap has a much lower mulitple than most competitors. The primary reason was their weak profitability. Wheras Recruit (6098.T) had net income margins around 7.5%, Pasona Group is just barely profitable. However the profitability has gone up the past few years compared to the last decade.

A positive trend can also be observed for the operating income as well as the gross profit margins. While the valuation thesis is not dependent on the core business it is still a positive that there is considerable room for improvement.

While margins had a slight improvement, the balance sheet remains pretty stable with enough cash to pay oustanding debt.

On the April 13,2021 they did a upward revision of earnings and also adjusted the dividend from ¥ 19 to ¥ 30 for the fiscal year ending May 31, 2021.

Most recent Earning Presentation and Financial Report from Pasona Group

Benefit One

Benefit One calls itself a "service distribution company", where they match services and good from suppliers with subscription models for their customers. Contrary to Pasona Group, Benefit One is a growing company in both revenue and margins.

Sharedresearch.jp created a report on Benefit One

Benfit One Latest earnings

Realization

While it is not clear when the discount will decrease, Pasona Group offers considerable upside with a huge margin of safety. While the CEO promised to increase returns for shareholder, the process has already taken a few years and it is unlikely that the discount will be removed quickly.

I initially found the company through AVI Japan Opportunity Trust plc annual letter, where they give a brief overview of their investment theory into Pasona. I am very thankful that I found such a great idea through their extremly well written letter. This is what they wrote about Pasona:

Pasona is not without its imperfections. It is controlled by the 68-year-old Yasuyuki Nambu, who has proved resistant to shareholder pressure. He has expanded the business into some questionable areas, and to encourage rural living, converted part of Pasona’s prime Tokyo headquarters into a farm - with livestock. While Mr Nambu has publicly stated that he will focus more on profits, as he is in control, the timing to cutting costs and increasing margins is firmly at his discretion. However, this is all well known and is why we are able to purchase a stake in Pasona at a 76% discount to its underlying value. What is more important is whether we can achieve an attractive risk-adjusted return considering these faults.
Pasona’s most recent quarterly results showed green shoots of an improving cost structure, with corporate overhead costs falling 15% and its non-Benefit One businesses recording a 6.6% operating margin (the highest quarterly margin in Pasona’s history). While part of the strong quarterly performance was due to temporary contracts to assist the Government in various coronavirus-related work, the higher margin continues a trend of improving profitability since 2017.The most accretive outcome for our investment in Pasona is the spin out of its stake in Benefit One to shareholders (tax-free). Illustratively, and we do not believe it will take decades to realise Pasona’s upside, even without an improvement in the value of Pasona’s businesses, we can wait 15 years to realise the value of Benefit One and return a respectable 10% annualised return. More optimistically, if we assume Pasona’s stake in Benefit One and its unlisted assets appreciate by 5% per year, we can wait 30 years (by which time Mr Nambu will be 98 years old and unlikely to be running the company) and achieve an annualised return of 10%.Pasona’s valuation is at such an extreme that a slight change in the market’s perception could see a dramatic upward shift in the share price: returning to the 67% discount at which it started 2020, would result in a 35% gain. The staggering upside potential coupled with signs of improving margins leaves us optimistic about Pasona’s future.

https://roiss.substack.com/p/pasona-group-2168t-buy-60-off-get

 

 

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