Baycurrent - A Japanese Gem, Well Positioned to Capitalize on Japans Digital Transformation

<5 min read

Introduction

Baycurrent is a Japanese consultancy business that has seen stellar growth over the last 5 years (CAGR):

• Revenue: 30%

• Net Income: 61.65%

• Levered cash flow: 43.9%

Thesis: Japanese legacy businesses are investing in their digital transformation. They have a lot of cash to spend to achieve this. Baycurrent is uniquely positioned to take advantage of this shift.

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The business

BayCurrent Consulting provides consulting services in Japan. The company serves high-tech, media, telecommunications, automotive and mobility, pharmaceutical, medical and nursing care, consumer goods, retail, machines, materials, banks, securities, insurance, power and gas, petrochemical, transportation and logistics, and public industries. BayCurrent Consulting, Inc. was founded in 1998 and is based in Tokyo, Japan.

Baycurrent Consulting's client base is diverse, ranging from small startups to established multinational corporations. Their ability to cater to clients of varying sizes and industries underscores their versatility and adaptability as a consulting partner.

Clients appreciate the firm's dedication to delivering results, their attention to detail, and their ability to navigate complex financial landscapes.

The fundamentals

• ROIC: 43%

• FCF growth 5Y: 43.9%

• Gross Margin: 55%

• Operating margin: 38.2%

• Cash conversion 5Y: 116%

• Interest coverage: 603x

• Total debt: 4.14BN JY

• Total cash: 36.6BN JY

The Stock

Baycurrent stock has compounded by 74% annually since its inception in 2016. From 192 to the current price of 5340.

The Growth (5-year CAGR)

• Revenue: 30%

• Earnings per share: 49.8%

• Free cash flow per share: 43.9%

• Book value (3Y): 136%

Competitive advantage

Baycurrent has operated in Japan since 1998 and combines deep industry knowledge, cutting-edge technology, and a client-centric mindset to deliver tailored solutions to their client's most pressing financial challenges. Having a company that understands the Japanese work culture and has cultivated relationships and trust in different industries serves as a narrow moat for Baycurrent.

Another aspect that sets Baycurrent Consulting apart is its embrace of technology. They leverage advanced analytics, artificial intelligence, and machine learning to analyze complex financial data and provide actionable insights that drive informed decision-making for its clients.

Baycurrent margins and return on capital suggest that they have a competitive advantage when compared to their peers:

Why own Baycurrent?

• Strong future growth prospects

• Wide margins suggest that there is a moat

• Doesn’t need debt to achieve superior returns

• High return on capital

• High FCF margins

• High insider ownership (14%)

The Risk

• Economic slowdown: Baycurrent’s big customers might cut down on consultancy spending and investments

• Multiple contraction risk: Baycurrent is highly rated, this may contract given the scenario described above

• Concentration risk: Main customers are in Japan, a Japan-specific slowdown will impact Baycurrent more than globally exposed consultancy firms like Accenture.

Valuation

FCF Yield is 2.4% (Risk-free rate is ~3.6%)

FCF growth has been 43.9% over the last 5 years. Can Baycurrent keep this growth?

My discounted cash flow analysis is conservative:

• Worst case: Next 5 years growth of 15%, then 10% for the next 10 years.

• Best case: 30%, then 20%

• Normal case: 20%, and then 16%

The weighted value suggests an intrinsic value of 6.9BN, suggesting a 16% upside or margin of safety.

Much of the value is in the future cash flows of Baycurrent. If they can execute and keep their growth rates high (Above 20% annually), I believe Baycurrent stock will turn out to be a good investment.

Conclusion

Baycurrent is an interesting investing case. Japan has historically been a hard country to invest in due to its corporate culture of thinking about survival over shareholder returns. But there is no doubt that there is value and great businesses to be found there.

I believe Baycurrent is a good play if you want exposure to Japan and the digital transformation going on there. The business is close to its intrinsic value, hence I would wait for a pullback to get a better risk/reward from this business. My entry price would be in the 4800 range.

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