$6086 Shin Maint Holdings. Maintenance Broker with Network Effects.

" One Decade of 30% CAGR Profit Growth"

Disclosure : Please be aware this post is solely my opinion, I hold shares in the business, therefore my opinion is completely biased. This is not a recommendation to buy or sale any securities.

Overview

Shin Maint Holdings Ltd. provides maintenance services in Japan. The company is a specialized service brokerage, mainly for the restaurant industry although it has made an effort to diversify into other fields as we will read later.

History

The company was founded on 1999 by Hideo Naito (81), the original idea was to provide store maintenance services for a restaurant chain, the original name was Tres Project Co. Ltd. This original client was using one of its subsidiaries to take care of their maintenance needs, this was clearly disrupting operations due to their inability to solve problems in a quick manner. Given this client initial satisfaction with the services, they decided to hire Tres Project to become their sole services provider across the country, and Mr. Naito saw the need-opportunity to create a network of maintenance provider in order to comply with this initial customer. This business model was non-existent in Japan, thus giving the company a large first mover advantage, and the network effects that would come later.

Business Model

• Why does the business exist?

Shin Maint has a simple business model, they operate in the intersection of large businesses that need services, and maintenance keepers & contractors that provide those services. The reason why they exist is also quite simple, it is an important hassle for any large corporation to either develop an internal maintenance crew, or have an specific contact for each issue that can arise in their premises.

Addressing these two situations quickly, which are also the main risks for the company in my opinion, having specialized maintenance workers on your payroll is expensive, their utilization is usually low, and they are most likely not able to perform jobs in all of the geography you might be present in. This in itself presents a challenge, and I am discounting the fact that very few contractors are able to handle, HVAC, plumbing, electricity, kitchen equipments, etc. at a successful level.

On the other hand, having an specific contact for each situation can be perhaps developed by a small business anchored in a given community for decades, it is unlikely that a large corporation opening stores at various locations has the time and expertise to find good contractors locally, in addition to that, the problem that many of these businesses have experimented when they have tried to use an individual contractor, is that they are not available at that specific moment, and as we know, a restaurant chain closed for a particular amount of time can be increasingly expensive for its owners.

• How do they make money?

Shin Maint Holdings currently have their revenue divided in two parts, what they call Emergency Maintenance Services (88%) and Preventive Maintenance Services (12%), these are very self explanatory. Initially, Emergency Maintenance Services made 100% of the revenues, the company realized that some of these could be prevented and around a decade ago they established “Maintenance Dojos” . The Maintenance Dojos are dedicated training centers that help customers learn and understand preventative and quick solutions for non-complex situations, this service shows the customer oriented characteristic of the business. In addition to this, and back on 2022, the company launched its service called P-Maint which uses all of the data collected during their 25 years on operations, to alert and advise customers about services such as the cleaning and disassembling of HVAC, inspections, kitchen deep cleaning, etc.

Shin Maint has also leveraged their business model for kitchen equipment manufacturers that were unable to provide internal warranty of service for newly purchased equipments, and they have also been working as an outsourcer in this situation.

The breakdown of revenue per service is as follows (Per FY 24)

1. Kitchen Equipment 24%

2. Plumbing. 17%

3. HVAC 10%

4. Electrical Equipment 7%

5. Other Maintenance 42%

There has not been a large shift in the revenue breakdown over the past 10 years other than the Kitchen equipment going from 37% (2015) to 24% (2024) and Other Maintenance going from 28% (2015) to 42% (2024). This trend is easily explained by the willingness of the company to diversify its business.

• Efforts to Diversify while adhering to the core

Back on 2014, the company had 84% of their revenue coming from restaurant chains, 10 years later, that number has decreased considerably to 70% while their revenue has increased 6x. Additionally the top 10 customers have decreased in revenue and gross profit contribution from 62%/57% in 2014 to 44%/40% in 2024 respectively. It is important to mention, that Shin Maint Holdings have been true to their core, avoiding unprofitable contracts from grocery stores and other retail stores, while safely and slowly entering long-term care facilities, beauty salons, etc.

• Competitive Advantage.

The business shows a defined network effect from their first mover advantage in the industry. Currently they hold over 10,000 maintenance keeper in their roster, the closest competitor is Sanki Service Co. which is focused on grocery and convenience stores, for comparison purposes, Sanki’s network is currently under 3,000 maintenance keeper, they also service a portion of their business with their own staff, and they are currently trying to pivot to some environmental services for their customers. Additional smaller competitors exist, but no network gets to 1,000 maintenance keepers as per the research I was able to do.

Acquistion

The diversification of the business has even more merit if we consider the fact that back on 2017 they acquired Tesco Co. in a stock exchange transaction, which was a competitor on the restaurants maintenance business. Tesco was a subsidiary of Skylark Holdings (3197) and it solely provided services to its restaurants, following the Shin Maint Holdings acquisition, the intention has been to make the operations more efficient and extend the customer base. As a good example of the management team we are presented with, Tesco revenues have grown from 6.6b JPY in 17’ to 9.6B JPY in 24’ and their profit margin has increased from 2.5% in 17’ to 4.3% in 24’, all this while diversifying away from Skylark which now represents around 58% of Tesco revenue. While Tesco has many of the same customers which provided some synergies, they have a different business model, they focus on fire inspections, septic tanks, pest control, waste management and other environmental related services. Tesco now uses the Network available to Shin Maint, but they also handle some specialized services with their own staff.

KPI Ratios

In any brokerage business, I believe that gross profit/net income per employee tells an important story about how efficient the capital and resources are being managed.

In 2014 there were 55 employees, 10 of them at corporate. GP/NI per employee was 15,1M/1,8M. GP/NI per corporate employee was 83.4M/10.3M.

Fast forwarding to 2024 there are 276 employees, 38 of them corporate. GP/NI per employee is 18.18M/3.12M. GP/NI per corporate employee is 132M/23M.

Capital Allocation.

The company has acquired shares for approximately 10% of their market cap over the past 3 years, two times it provided liquidity to Nomura Co. which was part of the Tesco transaction, and once in 2022 was solely with the intention to benefit shareholders. These shares are being held on Treasuries, and they have signaled they can be used for M&A, the buybacks have not been too accretive to this point.

When it comes to dividends, dividends per shares have 10x over the past 10 years, even though the cash have been built up from 1B JPY to 4B JPY, the intention is to continue with a payout ratio above 30% of earnings.

There are 4B net cash in their balance sheet, I would be cautious to discount this fully, as in Japan, enterprises are usually more conservative that one would like, and can carry excess cash for a long time. Regardless of this, management has demonstrated their ability to be reasonable with M&A on the Tesco Transaction.

Numbers

I will be quick with this because from the financials, I believe it is easy to see the business potential.

Revenue has compounder at around 18% CAGR over the past 9 years (15% excluding Tesco), operating income, net income and EPS have all grown at 32% CAGR.

Cash flow from operations have grown at 49% CAGR, similar numbers to FCF given the small capex and lease portion of the expenses.

In what is probably the most important metric of the business, ROE has grown from 8%, 10 years ago, to 26% currently, then again, this is keeping 4B JPY in the bank.

Dividends per share have grown at 30% CAGR.

Insiders

The Founder, Chairman, and President of Shin Maint, Hideo Naito, is the founder and has been holding his position for 25 years, he owns 21% . At his age, 81, one could be concerned about succession, as part of what I consider to be the succession plan, his second son Tsuyoshi Naito owns 7% of the company and is the current managing director for Shin Maint. Additionally, his elder son, Hideiro Naito owns 4% through his private organization. The Naito family owns over 30% of the company.

Risks

• Internalization of Maintenance from large organizations.

• Organizations going directly to Maintenance Keepers.

• Decline of Population in Japan.

• Decline of Number of Restaurants.

• Lack of quality control on Maintenance Keepers performance.

• Inability to find competent employees given the 24/365 nature of the business.

• Chairman and President eventual transition

Additional Information

The business recently deployed a small amount of capital, and is building HVAC cleaning robots, the success of this venture is yet to be determined, they plan to commercialize 100 of these per year, starting on 2025.

Conclusion

Shin Maint is a business that even growing at a modest organic rate, compared to the 30% they have displayed over the last decade, can and should provide a high return. The current multiple is modest for such a high quality enterprise, I believe the business to be trading at close to 6x current year EV/EBITDA and around 12x MC/FCF just to avoid the cash discount. Being the leader in their market, they hold around a 5% market share in what seems to be a 400-600B JPY TAM, taking the restaurant chains, and some long-term care, some beauty salon, they have a solid run rate, and if execution continues, their compounding growth should easily be in the double digits for years to come.