Deep Value – ItoKuro [6049.T] The Hands On Approach – 15/01/2025
The Purpose of this Piece
This piece lays out what our strategy for ItoKuro would be if placed in a management position.
Note: We don't hold any position with ItoKuro, or otherwise have any sort of affiliation.
Activities
Function – ItoKuro’s sites have overlap with each other. The company is running several similar websites for no apparent reason - The issue being that there are certain fixed costs associated with each website, regardless of the site's popularity. ItoKuro can save time by systematising the operation and combining the overlapping websites e.g. the two ‘Igakubu’ Med-school sites. This means they could concentrate their forces while still covering the same ground – avoiding the trade-off from specialisation most businesses see. The risk here is that through merging, we dispose of a site which generates significant word of mouth, therefore reputation. This would result in fewer users of the sites overall (providing the merger isn’t widely recognised – which doesn’t tend to happen.)
University coverage – We’d like to see the business move towards university coverage of subjects currently gaining popularity in Japan. A small niche is preferable, as it’s easier to dig your moat when uninterrupted. However, enrollment across subjects has been stable for the past five years, meaning that there isn’t a ‘subject niche’ to occupy. While this would usually be an issue, ItoKuro has minimal competition due to its existing niche. Developing a coverage of universities, generally, is still a low opportunity cost move we see as advantageous. But, this trades-off with allocating resources towards developing the quality of their existing coverage. This would yield returns, but is likely to bring in less users than if they were to expand. If the time ever does come when the opportunity cost of covering universities isn’t justifiable, we’ll encourage the development of their existing coverage (amongst these other suggestions.)
Finances
Management compensation is low-hanging fruit. We’d implement a plan for management to begin being paid in common stock with long-term lock-up periods e.g. 10 years. This aligns incentives, which is non-negotiable. The trade-off here is management feeling encouraged to boost share prices via aggressive accounting policies. While ItoKuro has remained a token of conservative accounting policies, as demonstrated by their stability, the risk still stands. This is most likely to be realised when a change in management occurs, typically a gradual process. In the long run, this would lead to very poor operating results, which forms a vicious circle we seek to avoid.
Share repurchases are essential here. Cash has remained at c.8Bn JPY over the past 5 years, and liabilities at c.560mn - not an efficient way to lay out capital. Repurchases should be considered a requirement in all situations where the stock is trading below NCAV. Management has a tax-free way of creating shareholder value. It seems like an obvious choice, and is one. They should budget to spend the cash in excess of current liabilities as follows:
Cash + equivalents: 8.23bn
Current liabilities: 0.65bn
Spending: c.7.5bn
We recommend allocating at least half of that cash to share repurchases this FY. Evidently, this has some urgency - no one knows how long the stock will remain undervalued for.
Dividends seem illogical to us. Why pay out taxed capital to shareholders when a longer-term tax-free method exists? If dividends were paid, it would not be with our vote. The only worthy benefit is it helps ItoKuro gather the attention it needs for the thesis to play out.
Shareholders (IR)
Displaying information in an organised and readily available way for shareholders is something often ignored by management teams as it doesn't fit into their roles. Reliable information can only be found on the Japanese Exchange webpage. While this is easy enough, only 5 years of data is available. This is an impediment to prospective shareholders which must be resolved. If you do try to get this information, you’re greeted with this on their website:
This makes it unnecessarily difficult for shareholders. It is not hard to upload some files to a website. There is minimal opportunity cost of doing this. Making things more cognitively demanding than is absolutely necessary yields no benefit. They should’ve thought about this by now, and resolved the issue.
A somewhat connected point is their not issuing English annual reports. While Japanese regulation has not made this a requirement, most investors are statistically more likely to be foreign, and English is their best bet (Spanish would also be acceptable). While you can use a document translator, the complexity of the Japanese language means that certain words come up as something it shouldn’t e.g. the phrase ‘golden forehead’ came up once. As amusing as it is, it’s not practical. While the benefits would not be all that great, it will help ItoKuro show that they are concerned with their shareholders. Like with anything in IR, it's a precautionary measure. Minimizing the danger of developing a negative reputation in the market is paramount to the future gaining of attention required for the thesis. People won’t invest in something they feel isn’t acting in their own best interest – and rightly so.