System Integrator Corp (3826): a Japanese microcap with high earnings quality
System Integrator Corp is a software company with three business segments. The three business segments are Browser (sql database development tool and project management tools), E-Commerce (web-shop software), and ERP (ERP package “Grandit”). The company has sold 60% of the E-Commerce business. The transaction closed on January 2024. I think this business does not need much capital and does not need to spend much on research and development.
My analysis depends on the accuracy and readability of computer translations of Japanese.
This is a very small company. At 402 JPY per share the market cap is 30.4 million USD and the enterprise value is only 14.4 million USD. The stock trades with code 3826 in Japan, with low trading volume. The stock is attractive because of its low EV/EBIT multiple below 5. The volatility of the stock price is also low.
Furthermore the balance sheet is strong with low leverage, a high current ratio, lots of cash and without debt.
The Piotroski score is high. The company pays a small but fluctuating dividend each year. In financial years 2020 and 2023 the company spent small but still significant sums on repurchases.
Substantial shareholders: Senior Managing Director and CIO Mitsuru Usui 19.80%, chairman Hiroyuki Umeda 13.15%, Kazue Umeda 9.93%, the CEO Satoshi Hikiyashiki 1.38%. The annual report mentions three other individuals holding more than 1% each.
Last financial year five directors earned together 75.5 million JPY including 5.4 million JPY of negative performance-based stock compensation.
On 24 May 2022 the company changed its auditor: EY Ernst & Young ShinNihon LLC was replaced with Taiyo LLC. I think the company changed its auditor because auditors should not serve the same company for too many years in a row from a governance perspective.
Related party transaction: last financial year the company made an investment of about 200k USD in a 83% owned Vietnamese subsidiary. That subsidiary develops software for the company.
My take: Japanese software house with low EV/EBIT and 8-year metrics showing good earnings quality. Probably well managed. I have not found anything worrisome. I like the dispersed ownership between several managers and outsiders. Going forward earnings will be lower because the company has sold 60% of the webshop software business for a big one-time gain of nearly 1 billion JPY. But I don’t expect the decline to be more than 30%. Let’s see what company will do with the proceeds of this transaction.
Disclosure: long System Integrator Corp.
Cheap yes. 5 year chart is scary despite the cheapness. growth is up and down. dividend payout is ok. net cash and all that.