Well Investments Research has just published a report on Aeria (3758) which can be found here.
We thought we would contribute to the debate by adding a few charts from our App.
The stock has fallen 46% in the last three months but is still up 170% over 1 year and flirted with our ‘overbought’ line in July.
Revenues have fluctuated wildly since listing in 2002, but have recovered recently following a string of acquisitions.
Operating Income has swung from -¥1.5b to over ¥1b in the last two quarters – a remarkable turnaround, at least in terms of accruals.
The market has been pumped up by the company’s forecasts for Operating Income for the current year, which have been raised twice so far this year and are now 5.8x their original forecast made on 15th February.
Note that the company has a history of making aggressive forecasts that it later revises down (2010, 2011, 2012, 2016) although it did not make any forecasts for 2014 and 2015. Aeria has a Japan Analytics ‘Forecast Accuracy Score’ of -80 (100 is perfect).
Extreme caution is advised and, according to the Well report, is merited.
Although we prefer to use accrual accounting for valuation, cash flows analysis is always revealing, especially for quarterly periods as cash flow numbers are not often provided in Kessan Tanshin reports.
Aeria’s cumulative Operating Cash Flow (OCF) over the last 28 quarters is ¥-3.1b.
Of more interest, is the large negative gap between Receipts and Payments of ¥-4.4b.
OCF would have matched that number save for a ¥2b increase in Other Current Liabilities in 2015Q2 which related to their string of acquisitions.
Add in the acquisitions and Free Cash Flow (FCF) is close to ¥-4b.
Unusually for a Japanese company, the negative FCF has been offset more with equity issuance (¥6.3b) than debt finance (¥2.4b). The net effect has been a positive change in cash of ¥3.4b.
The shares issued to pay for these acquisitions increased shares outstanding by 57% not counting shares to be issued on conversion of warrants which Well estimated to add a further 16% to the total.
Well considers Aeria to be worth ¥465 per share. Based on trailing twelve-month data, the Japan Analytics Residual Income model suggests ¥309. If, however, the company were to achieve its forecast Operating Income, the model’s no-growth valuation rises to ¥2,624 or 48% upside from yesterday’s close.
The market has been seduced by the siren call of this company’s forecasts which it has a consistent record of undershooting.
If Well is right about A3’s inflated numbers, Aeria will maintain its track record although the scale of the coming ‘miss’ will be significant.
We hope that the sellers of the acquired businesses were not ‘locked-up’ and were able to take advantage of the current A3 hype to move on as the shareholder breakdown below suggests.
The other 80% individual investors in Aeria should perhaps follow their example and Well’s advice.