Sohgo, founded in 1965 and based out of Tokyo, Japan, is a leading security services company in Japan that contributes to crime prevention. The Group, with over 65,000 employees, initially started as a provider of electronic security services and then started providing home security services in 1988. The company further forayed into delivering long-term care services in 2012, responding to the needs of a super-aged society.
The company has divided its business units into the following segments – Security Services accounted for 72% of 1HFY25 sales, followed by Facility Management Services at 13%, Long-term Care Services at 10%, and Overseas Services at 5%, with a focus on Southeast Asia.
Growing demand for security services
The demand for security services is increasing, driven by a rise in cyber-attacks on critical public infrastructure and supply chains, as well as an increase in violent street crimes and traffic accidents. The demand is also augmented by concerns about the safety and security of the vulnerable sections of society including the elderly, women, and children.
The necessity for robust security services is substantiated by a YoY increase in criminal offences in Japan in 2022, marking the first rise since 2002, and the trend is expected to increase further. As a result, Sohgo’s role becomes increasingly important to thwart criminal activities in Japan and provide a safe and conducive environment to the general masses.
Additionally, the company started offering new services including security facility management and long-term care, broadening its service offerings and revenue streams. Consequently, total contracts across different business units have shown a steady increase of 3.5% YoY, reaching 1.3mn in 1HFY25.
Buoyed by the increasing demand for security services and aided by new revenue streams, the Group anticipates net sales of JPY550bn in FY25, up from JPY521.4bn in FY24, with operating income of JPY40.3bn (FY24: JPY39bn) and net income of JPY27.6bn (FY24: 27.3bn).
Maximizing shareholder wealth
The company registered a modest CAGR growth of 3.3% in revenues over the period FY19-24 to reach JPY521bn. A similar trend was observed in operating income performance, which grew at a CAGR of 3.9% to JPY39.1bn, demonstrating a margin expansion of 23bps to 7.5%. Net income performance fared marginally better during the same time, growing at a CAGR of 4.2% to JPY27.3bn in FY24.
As discussed, the company reported decent top-line growth in 1HFY25, driven by a solid YoY surge of 287% in the Overseas Services business to JPY13.1bn. The Group’s flagship Security Services business demonstrated a YoY rise of 3.1% to JPY190.4bn, led by 5.6% growth in Transportation Security Services to JPY35.5bn. Long-term care services also demonstrated increased traction in sales, growing 5% YoY to JPY26.4bn.
However, the operating income and net profit declined during the period, owing to reasons including wage raise, costs related to the end of 3G transmission, and an increase in allowance for doubtful accounts. As a result, the operating profit and the net profit decreased 12.5% and 14.9% YoY to JPY15.6bn and JPY10.0bn, respectively.
The company has prioritized returning shareholder wealth and has a history of paying sustained dividends over the past decade, demonstrated by an increase in dividends and payout in recent years. The payout ratio stood at 28.7% in FY22, followed by 36.4% in FY23, and 43.6% in FY24. The management forecasts to pay a total dividend of JPY24.8 for FY25, implying a dividend yield of 2.3%.
Price decline enhances valuations
Sohgo is trading at a reasonable P/E ratio of 18.4x based on an estimated FY25 EPS of JPY56.3, compared to a global peer average of 36.1x. Valuation through the EV/EBITDA approach also yields a similar result, reflecting a lower multiple of 7.2x for Sohgo, compared to a global peer average of 20.7x.
Hence, valuations seem to favour the company, despite a run-up in prices in the last 12 months. However, over the past one month, the stock declined by over 3%, providing an opportunistic case for evaluation to value-hunting investors. Out of 6 analysts covering the stock, 2 have an ‘Outperform’ rating, while 1 suggests ‘Buy’ for an average target price of JPY1,235, indicating a substantial upside potential of over 18% from the current levels.
Overall, the company looks poised to reap the benefits of demand for security services and related fields, aided by positive fundamentals, reasonable valuations, and new revenue streams. Moreover, Sohgo has an added responsibility to safeguard the security scenario of the country against the backdrop of escalating criminal offences.
However, rising input costs pose a challenge to the Group’s margins. Labour costs, which form a major component of the overall cost structure, are prone to increase in diverse geographic regions owing to rapid increases in inflation levels. This can dent the company’s profitability in the long run. Nevertheless, the sustained demand for Sohgo’s products and services should aid the Group’s objective to achieve sales of JPY650bn in FY26, as per the current Medium-Term Management Plan.