San Holdings: Pandemic turns mourners away but expansion shows the way
Tokyo-listed San Holdings is the largest funeral services provider in Japan with additional businesses in leasing office space and parking lots. It is considered a major player in densely populated areas such as Tokyo. San’s performance was underwhelming compared to our other picks, recording a 16.2% loss over the last six months, and underperformed the other two benchmark indices, the MSCI Japan and Nikkei 225 which lost 7.4% and 4.7% respectively over the same period.
The impact of Covid-19 on San has mostly been negative. The pandemic, which worsened during the January–March period, had a severe impact on the Japanese economy, leading to a steep drop in consumer spending. The Japanese funeral market was also affected by this, along with social-distancing measures and policies. As a result, the number of people attending funerals declined for this period, which translated into lower ancillary revenue for San as less food, flowers and other extras were required. In addition, the elaborate funerals of former business executives, which were often paid for by their former companies, have been postponed or cancelled.
Prior to the crisis, the funeral services industry was already changing, with the number of funeral attendees declining. Part of this can be explained by Japan’s ageing population where the deceased do not have that many friends of the same age group coming to pay respects.
Along with shifting values, there is also a growing number of Japanese not too bound by traditional funeral formats and attendant expenditures. Hence, funeral services companies have had to adapt, and some of these initiatives include building small funeral halls with distinctive features and using internet and other channels to increase the volume of business. This is an opportunity for San as more specialised funeral ceremonies command higher margins and profitability.
San reported decent results for its FY2020 ended March 31. Compared to the previous year, the number of funerals increased 2.1% while operating revenue increased 2.5%. Operating profits were also strong, with a 5.2% year-on-year growth. San’s operating margins also slightly improved from 14.2% in the previous year to 14.5%. Liquidity and solvency ratios of the companies are also excellent, with a current ratio of 2.3 times and debt-to-equity ratio of only 2.0%. The company’s free cash flow yield is very attractive at 18.4%, while a dividend yield of 2.6% is also great in comparison with the risk free rate of just 0.01%.
Moving forward, San’s new three-year management plan is centred on providing a more rounded package of services that includes end-of-life support. For example, it started a service which focused on the rehabilitation of families; in April, it launched a service supporting senior citizens, primarily during the final stage of life, including the period immediately before and after a funeral; and it is opening four new funeral halls.
There are no analysts covering the company due to its small market cap of just JPY14.6 billion ($ 191 million). We think that although Japan’s death rate is expected to grow in the low single-digits over the next five to 10 years, the changing industry dynamics allow companies such as San to become more profitable, but at the cost of lower revenue. With recovering sentiments from the pandemic, our valuation of the company is around JPY1,500, which is 24.6% above its current price of JPY1,204 for the next six months. E