Even with the best healthcare, there is always a limit to a human being’s lifespan. For a sure bet on long-term prospects, look nowhere else than San Holdings, a Japan-listed funeral services provider, which is a leading player of its kind in a market with world’s oldest population.
SINGAPORE (Jan 23): Tokyo-listed San Holdings (San) is the largest funeral services provider in Japan. Three of its main subsidiaries, Koekisha Group, Sou-Sen Group and Tarou Group, provide funeral services. The fourth, Holding Company Group, leases real estate, office spaces, and parking lots.
The funeral services industry won’t go out of business as long as people continue dying. Coupled with inelastic demand, and a strong economic moat, San’s leading market share makes it a low-risk stock to own for the longterm. Particularly for Japan, there’s growth as well. According to data from the United Nations, Japan’s death rate, which stands at 10.9 per 1,000 people, is expected to grow by 2.0% and 1.9% annually by 2025 and 2030 respectively.
San’s growth in fundamentals, represented by net profits, OCF and FCF have been strong over the past five years, with a CAGR of 16.0%, 13.4% and 16.1% respectively. The price CAGR for the company over the same period has also matched the fundamental growth, with a value of 14.4%. This implies that a company with sound financials like San will likely see a price growth to match its growth in the future, and hence more rewarding to shareholders.
In its most recent 2QFY2020 for the fiscal year ending March 31, 2020, San managed 5.2% y-o-y increase in the total number of funerals handled, and 2.8% y-o-y increase in revenue generated. Total operating revenue and operating profit was also up 3.5% and 2.0% respectively for the same period.
San’s yields are very attractive compared to the benchmark Japanese risk-free-rate of 0.01% (see chart 1), with an earnings yield, dividend yield, OCF yield and FCF yield of 13.1%, 2.0%, 14.6% and 9.2% respectively. The company’s balance sheet is excellent with comfortable liquidity and solvency ratios. The current and quick ratio are 1.8 and 1.7 times respectively, well above the 1.0 times benchmark.
San also has very little debt. Its debt to equity is just 5.4%; while its interest coverage ratio is a very strong 317.9 times. Further, the balance sheet stands out in relative terms to the price. The price to NAV and price to NTA are only at a very attractive 0.65 times. Operating margins, which represent the economic moat of the company, have also risen sharply from 10.0% to 14.3% over the past five years. San is one of the most attractive stocks among its regional peers. It trades at a 63%, 83% and 69% discount for its P/E, EV/Ebitda and P/B respectively.
In 2019, San started a three-year medium-term management plan, with the goal of providing total support for the final stage of life. On top of additional potential revenue from the new services, San is growing the traditional way: opening more funeral halls. Last year, two new ones were opened, and more new halls can be expected.
Changing with the times
Additionally, San’s management have observed that the number of people who attend funerals is declining. To address this, it will explore initiatives such as building small funeral halls with distinctive features, providing innovative services, using internet matching sites and other channels to increase the volume of business. This in turn can be monetised better and improve San’s margins overtime.
There are no analysts covering San Holdings, given its small market cap of just JPY17.4 billion ($213 million). Based on our discounted asset analysis, the intrinsic value of San is JPY1,894 while the intrinsic value based our discounted cash flow (DCF) analysis is JPY1,947. Although both the values are at 31.6% and 35.3% respectively above the current trading price of JPY1,439, this target price is over the next three years, or in other words, investors can expect around 10% returns a year. San is an undervalued gem that is suitable for long-term, low risk-investors.
