Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

Internet Initiative Japan / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/internet-initiative-japan" target="_blank" data-smartkarma-citation="entities:10444:1" rel="noopener">Internet Initiative Japan (3774 JP)</a> (IIJ) has moved from strength to strength over the last 12-18 months as long-term relationships with corporate customers translate into higher revenue as new services are introduced and corporate IT budgets increase. Just as impressive, results for FY20 indicate margin improvement will come along more quickly than expected and we have raised our forecasts to reflect that with c. 30% higher operating income over the next three years driving a corresponding increase in our target price from ¥3,270 to ¥4,300. With 21% potential upside, we remain at Buy.

Internet Initiative Japan (3774 JP) (IIJ) has moved from strength to strength over the last 12-18 months as long-term relationships with corporate customers translate into higher revenue as new services are introduced and corporate IT budgets increase. Just as impressive, results for FY20 indicate margin improvement will come along more quickly than expected and we have raised our forecasts to reflect that with c. 30% higher operating income over the next three years driving a corresponding increase in our target price from ¥3,270 to ¥4,300. With 21% potential upside, we remain at Buy.

Internet Initiative Japan (Buy) Well-Positioned for Corporate IT Spend, Raising Forecasts/Valuation

KDDI posted results that were largely in-line with consensus forecasts for Q4 and slightly ahead of our forecasts for FY21. As with recent quarters, operations were characterized by relative weakness in consumer offerings but strength in sales to corporates. The company sent a strong message on shareholder returns with the dividend going from ¥120 to ¥ 125 (the 20th straight year of increases) and a ¥150bn share purchase program (both in-line with our expectations). On the aggregate, with all telcos reporting, the incumbents are guiding to financial stability despite regulatory-driven price reductions and a more aggressive investment program by new entrant Rakuten. At 6x EBITDA and 12.5x EPS, KDDI shares look attractive and we remain at Buy.

KDDI posted results that were largely in-line with consensus forecasts for Q4 and slightly ahead of our forecasts for FY21. As with recent quarters, operations were characterized by relative weakness in consumer offerings but strength in sales to corporates. The company sent a strong message on shareholder returns with the dividend going from ¥120 to ¥ 125 (the 20th straight year of increases) and a ¥150bn share purchase program (both in-line with our expectations). On the aggregate, with all telcos reporting, the incumbents are guiding to financial stability despite regulatory-driven price reductions and a more aggressive investment program by new entrant Rakuten. At 6x EBITDA and 12.5x EPS, KDDI shares look attractive and we remain at Buy.

KDDI Q4 20 Results: Slightly Better Guidance and Solid Shareholder Returns

The IIJ story is better than we expected. The company again posted sector-leading growth in profitability with a direct reward to shareholders through a 42% dividend hike for this year (¥21 to ¥29.75) and a further 24% for FY21 (to ¥37). Guidance for FY21 is ahead of consensus and Redex expectations as are the company’s FY23 (Mar-24) mid-term financial targets for revenue and operating income. This growth trajectory is rare in the Japanese telecoms industry and is supported by exposure to growth areas (cloud, security and IoT) with less offset from weaker segments like consumer mobile. We consider IIJ a core telecom holding and the financial report today demonstrates why. Shares are up 9% in the afternoon session and we think the mid-term forecasts and a higher dividend can sustain further upside. We reiterate our Buy rating.

The IIJ story is better than we expected. The company again posted sector-leading growth in profitability with a direct reward to shareholders through a 42% dividend hike for this year (¥21 to ¥29.75) and a further 24% for FY21 (to ¥37). Guidance for FY21 is ahead of consensus and Redex expectations as are the company’s FY23 (Mar-24) mid-term financial targets for revenue and operating income. This growth trajectory is rare in the Japanese telecoms industry and is supported by exposure to growth areas (cloud, security and IoT) with less offset from weaker segments like consumer mobile. We consider IIJ a core telecom holding and the financial report today demonstrates why. Shares are up 9% in the afternoon session and we think the mid-term forecasts and a higher dividend can sustain further upside. We reiterate our Buy rating.

Internet Initiative Japan Q4 20 Results – Blowout Quarter / Guidance and Massive Dividend Hike

Thematic (Sector/Industry)

The past nine months have been a wild ride. The industry has largely avoided the disruption of Covid-19 but NTT’s ¥4 trillion DoCoMo restructuring and regulatory-driven price reductions have shaken things up whilst competition from Rakuten is likely to heat up as it raises cash and accelerates investment. Mobile revenues will be down but that can be made up in other areas and whilst profitability in FY21 is flat at best and likely down modestly, shareholder returns are stable to growing.  NTT and KDDI are top picks with Softbank offering modest upside whilst we are more cautious on Rakuten after a 46% YTD run which largely captures the upside potential a more competitive mobile service offers.

The past nine months have been a wild ride. The industry has largely avoided the disruption of Covid-19 but NTT’s ¥4 trillion DoCoMo restructuring and regulatory-driven price reductions have shaken things up whilst competition from Rakuten is likely to heat up as it raises cash and accelerates investment. Mobile revenues will be down but that can be made up in other areas and whilst profitability in FY21 is flat at best and likely down modestly, shareholder returns are stable to growing.  NTT and KDDI are top picks with Softbank offering modest upside whilst we are more cautious on Rakuten after a 46% YTD run which largely captures the upside potential a more competitive mobile service offers.

Japan Telecom Sector: FY21 Will Be Tougher and More Competitive but Returns Can Still Rise

We consider Internet Initiative Japan (IIJ) to be a core holding in the Japan telecom space, supported by exposure to faster growth corporate revenue buoyed by a track record of success in bringing new products and services to market. The company has generally operated at the leading edge of service offerings being among the first to offer cloud services and MVNO mobile, followed more recently by network tools like security and IoT solutions. This progression of adding services to sell into a receptive enterprise user base has helped generate consistent top-line growth for over 20 years with margin improvement and free cash flow generation now ramping up. We value IIJ at ¥3,270/share and with 25% potential upside we are initiating coverage at Buy.

We consider Internet Initiative Japan (IIJ) to be a core holding in the Japan telecom space, supported by exposure to faster growth corporate revenue buoyed by a track record of success in bringing new products and services to market. The company has generally operated at the leading edge of service offerings being among the first to offer cloud services and MVNO mobile, followed more recently by network tools like security and IoT solutions. This progression of adding services to sell into a receptive enterprise user base has helped generate consistent top-line growth for over 20 years with margin improvement and free cash flow generation now ramping up. We value IIJ at ¥3,270/share and with 25% potential upside we are initiating coverage at Buy.  

Internet Initiative Japan - Potential Growth Remains Under-Appreciated (Initiation of Coverage)

Japan

Kakaku.com, Inc provides price comparison services and products information through its website.  The Company also provides Internet advertising services.

mixi, Inc. operates community style website, mixi.  The Company sells advertising spaces on its website.  mixi also runs online recruiting services for IT related positions.

GMO Internet, Inc. provides internet related services to its corporate customers. The company offers domain, server, security and settlement services through its "WEB Infrastructure & EC" business, and assists companies in attracting web users through its "Internet Media" business.

DeNA Co., Ltd. operates social media site, auction and shopping web site such as Mobage-town and Bidders.  DeNA also provides mobile-related services such as mobile game and community site.

DIP Corporation provides matching services through Internet for job agencies and job seekers. The Company also provides matching services for companies and part-time workers as well as companies and job agencies.

SAKURA internet Inc. provides comprehensive Internet service to businesses. The Company operates a data center and leases space to store clients' servers and network equipment.  Sakura Internet also offers web hosting and Internet connectivity services.

SMS CO.,LTD. is a website operator regarding elderly care.  On its websites, the company provides a variety of information contents related to employment placements for senior care assistants and doctors, as well as medical and nursing qualifications.

Gree, Inc. operates a Social Network Service, GREE for PC and mobile users. The website provides online communities and games to its members. The Company also sells advertising space through advertising agencies.

Bengo4.com Inc offers lawyer and tax accountant advisory website services.

Infomart Corporation provides business to business (B2B) e-commerce services for food industry.  The Company offers ordering systems as well as database systems that contain detailed information about food ingredients.

Five9, Inc. provides cloud contact center software. The Company offers real-time and historical reporting, recording, quality monitoring, workforce, and customer relationship management integrations. Five9 serves customers worldwide.

Alarm.com Holdings, Inc. provides interactive security solutions for home and business owners. The Company offers security systems such as image sensor, crash and smash protection, web control, mobile access, and video monitoring. Alarm.com Holdings operates worldwide.

Wangsu Science & Technology Co., Ltd. provides online business solutions in China. The Company also provides Content Delivery Network (CDN), and Internet Data Centers (IDC).

Shanghai Wangsu Science & Technology Co (300017 CH)

Envestnet, Inc. develops and markets computer software for financial advisors. The Company develops Internet-based software that includes risk assessment, investment strategy selection, asset allocation, research and due diligence, portfolio construction, proposal generation, paperwork preparation, model management, account rebalancing, account monitoring, and other features.

Yelp Inc. operates a social networking, user review, and local search web site. The Company provides the site as a guide for online search capabilities for its visitors to find reviews and details about local businesses. Yelp provides listings for businesses throughout the United States and Canada.

Ziff Davis, Inc. operates as a digital media and Internet company. The Company provides portfolio which includes brands in technology, entertainment, shopping, health, cybersecurity, and martech. Ziff Davis serves customers worldwide.

People.cn Company Limited mainly engages in internet advertising, information services, mobile value-added and technical services. The Company's main products include original messages, government information services, public opinion research and consulting, mobile news, and ISP services.

Autohome Inc is an online destination for automobile consumers in China.  The Company delivers comprehensive, independent and interactive content to automobile buyers and owners.

GDS Holdings Limited operates as a holding company. The Company, through its subsidiaries, develops and operates data centers. GDS Holdings offers risk and security management, information technology planing, remote monitoring, cloud hosting, virtualization, disaster recovery, and remote data protection services.

INESA Intelligent Tech Inc. operates in the IT industry. The Company designs and manages cloud servers and big data applications for businesses. INESA Intelligent also manufactures electronic components.

Internet Initiative Japan Inc. provides Internet connection services for businesses.  The Company also provides system integration services and sells system equipments.  Internet Initiative Japan offers a variety of services, including network consulting, security, and Web hosting as well.

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Internet Initiative Japan (3774 JP)

Internet Initiative Japan (Buy) Well-Positioned for Corporate IT Spend, Raising Forecasts/Valuation

We have updated our forecasts to reflect a strong FY20 finish and management guidance. This takes OP higher by c. 30% on average driving a similar...

Kirk Boodry

KDDI Q4 20 Results: Slightly Better Guidance and Solid Shareholder Returns

KDDI results were in-line and guidance implies growth in other areas can offset consumer mobile erosion. Good report but there may be near-term...

Kirk Boodry

Internet Initiative Japan Q4 20 Results – Blowout Quarter / Guidance and Massive Dividend Hike

We consider IIJ a core telecom holding and the financial report today demonstrates why. Shares are up but the mid-term forecasts and a higher...

Kirk Boodry

Japan Telecom Sector: FY21 Will Be Tougher and More Competitive but Returns Can Still Rise

FY21 will be a tough year for mobile with 5% service revenue erosion but new services provide some offset and returns to shareholders can still...

Kirk Boodry

Internet Initiative Japan - Potential Growth Remains Under-Appreciated (Initiation of Coverage)

We consider IIJ to be a core telecom holding in Japan and are initiating coverage on IIJ with a Buy rating and a ¥3,270 target price

Kirk Boodry

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