San Holdings
Eternal hold: Japanese’s largest funeral services provider suffers pandemic hiccup but long-term growth trajectory stays intact
There are four stocks from last year that we have kept in our new portfolio and San Holdings is one of them. The Tokyo-listed company is the largest funeral services provider in Japan. San operates four main subsidiaries which collectively make up the group. Three of the subsidiaries provide funeral services, which are Koekisha Group, the core company and largest revenue contributor; Sou-Sen Group; and Tarui Group. The other subsidiary is Holding Company Group, which leases real estate, office spaces and parking lots. San only operates in Japan, mainly in the Kansai, Osaka and Tokyo regions, along with Shimane, Hyogo and Tottori prefectures. San has a strong presence in densely populated areas such as Tokyo, which makes it a recognised name in the industry.
Apart from providing funeral halls, the funeral service business of San covers a range of services. These include providing information about funerals and graves in desired locations through websites, selling products associated with funeral rituals such as flowers and courtesy gifts, food and refreshments, and memorial service items. Besides offering services to families, it caters to the corporate sector where funerals are paid for by companies.
Our case for San is that the company is a leading player in a market that has both short-term catalysts and long-term prospects for growth — an undervalued company that will recover over the short term and see stable growth over the long term.
The company’s business model is simple and easy to understand, just like any company that provides death care services. As long as mortality exists, this industry, which has very inelastic demand, will thrive. This translates to a strong economic moat, particularly for San, as it is the largest funeral services provider in Japan and has a strong presence in densely populated areas. Japan is home to the world’s oldest population, representing a prospective market where San can continue to provide its services to.
We think the business model of San is more inelastic than average, simply because it is located in a culturally-strong place like Japan, where rituals and funeral services are more important than usual, denoting the potential for stickier earnings and better margins.
The Covid-19 pandemic has adversely affected the company’s business and financial performance, which caused an economic downturn in Japan. For the first half of the latest financial year, San reported weak results, led by a sharp decline in consumer spending.
Currently, consumer spending has started to slowly recover, but consumer spending that involves physical face-to-face services remains relatively low. Japan’s funeral services industry is one such industry where consumer spending significantly dropped — though the number of companies continuing to demand for corporate funerals is recovering.
The pandemic has changed the dynamics of how funeral services are traditionally conducted too. For example, the size of funerals is decreasing due to a decline in the number of mourners and social gathering restrictions. This affects the group’s entire business as revenue from other services such as food, memorial service items and courtesy items would decrease. Additional costs will also be incurred by funeral services providers as funeral halls will have to be sanitised and cleaned more regularly.
Having said so, San is adapting to these changes and improvising. Koekisha Group, San’s core company, started a remote funeral participation service that uses the internet to view funeral proceedings. This monetised service allows people who are not able to attend a funeral due to Covid-19 precautions to experience the ceremony online. The online participation has also been extended to funeral consultations and seminars that were initially held at physical funeral halls for customers who do not wish to be physically present — and this has also been monetised.
San’s focus aside from the pandemic is to broaden the line-up of its end-of-life support portfolio. This includes providing information relating to graves and funerals online which improves its customer experience as it is personalised to the needs of its customers. The company’s share price, having declined significantly, should see a strong recovery, given the scheduled vaccination rollout. Once the economy picks up and social movement restrictions lifted, San ought to see strong profitability, as it has historically before the pandemic.
In 1HFY2021 ended Sept 30, 2020, San posted a poor set of results due to the pandemic. The number of funerals fell 2.7% y-o-y, along with a decline in operating revenue and profits of 17.1% and 47.9% respectively. For a trailing 12-month period, the company’s earnings, operating cash flow and free cash flow yields were very attractive at 10.6%, 24.5% and 19.4% respectively. If this is not a clear indication that the company is undervalued, the company trades at significant discounts to its local and regional peers for its P/E, EV/Ebitda and P/B multiples, as illustrated in Chart 1.
Meanwhile, the company is in very good financial health, with a current ratio of 2.3 times that reflects strong short-term liquidity; and a debt-to-equity ratio of 2%, which indicates that company is unlikely to go under. The company is also very cash-rich as it has more than enough cash to cover its total liabilities and can use it to weather any additional expenses without diluting shareholder value, if the another situation similar to Covid-19 emerges. Furthermore, despite a poor period, the company has announced the payment of dividends. At current prices, the dividend yield is a strong 2.8% compared to the risk-free rate of 0.06%.
There is no analyst coverage for San as it is a small cap. Our in-house valuation of the company indicates that the stock offers at least 25% upside over the next 12 months. Given its short-term catalyst of consumer spending recovery and long- term growth prospects, San is a bargain that investors ought to take to the grave, if possible.