Elite Client Idea #109

Alpha Group Inc. ‘Alpha’ (TSE Ticker: 3322; Price: ¥612/share) [NCAV]

(Latest financials are for the year ended March 31st 2024; NCAV: Net current asset value i.e. Current Assets minus ALL liabilities - a proxy for liquidation value)

Alpha operates agency businesses in the following segments:

 

– 5G marketing (77% of FY24 revenues; 57% of profits; 39% of assets),

 

– B2B marketing (6%; 28%; 17%), and

 

– Environmental sustainability (17%; 15%; 44%)

 

5G: It operates as a primary and secondary agent for major Japanese telecom carriers (NTT Docomo, Rakuten, Softbank, etc.) – selling telecom equipment via its stores, and other distributors.

 

B2B: It’s the agent for Kaunet – selling office stationery.

 

Environmental: It primarily leases LED lighting equipment (to reduce customers’ upfront costs – and ease their transition from fluorescent lighting). Some of these lease receivables are sold via securitization (¥717mn in FY24).

 

The 5G segment is mature – and characterized by longer replacement cycles due to rising device prices. Further, telecom carriers are consolidating their store presence.

 

The B2B segment is exposed to intense competition from online retailers. Alpha has invested in the environmental segment to reduce dependence on its 5G and B2B suppliers.

 

Forecasts for FY25 earnings are lower than FY24, and management has indicated they’ll focus on reinvestments to secure stable earnings.

 

Alpha reported:

 

FY24 Revenues: ¥13.9bn (FY23: ¥13.6bn)

Pre-tax Earnings: ¥751mn (FY23: ¥547mn)

Net Profits: ¥401mn (FY23: ¥233mn)

 

Revenues have declined since FY19 but profits have kept up due to the development of the environmental segment.

 

Five-year net profits (since FY20) averaged ¥376mn/year. Free cash flows (excluding investments in marketable securities and loans) averaged ¥323mn/year in the same period.

 

The financial position is strong with net cash of ¥689mn.

 

NCAV is ¥3.6bn – including ¥946mn in long-term interest-bearing deposits, ¥175mn in real estate, and ¥43mn in securities (all at market value).

 

Receivables are higher than historic averages but comprise large creditworthy entities – hospitals, educational institutions, and government agencies. Collection issues don’t seem significant. (Even allowing for this, the NCAV backing seems adequate – see below.)

 

There were questionable/opaque acquisitions (¥200mn), unlisted investments (¥30mn), and losses on “crypto assets” (¥6mn) in FY23/24 – but these aren’t material.

 

Tangible equity stood at ¥4.7bn.

 

The equity sells for ¥2.9bn, which is 81% of NCAV, 0.61x tangible equity, 7.7x earnings, and yields 11.1% in free cash flows.

 

Alpha has engaged in intermittent repurchases – reducing outstanding shares. FY24 repurchases (¥588mn at prices averaging >¥620/share) and dividends (¥86mn) yielded 23.2% at market.

 

Despite 5G store consolidation and online competition, there’s still substantial demand for physical stores.

 

Though growth prospects aren’t spectacular, the equity appears to be priced below its value to a private owner – and meets investment tests.