BRIDGE REPORT
TAC Co., Ltd. (4319)
Hiroaki Saito, President
Hiroaki Saito, President
Corporate Profile
Company
TAC Co., Ltd.
Code No.
4319
Exchange
1st Section Tokyo Stock Exchange
Industry
Services
President
Hiroaki Saito
HQ
3-2-18 Misaki-cho, Chiyoda-ku, Tokyo
Business
Description
TAC provides education and training for both university students and working people seeking to obtain various certifications and qualifications based upon its fundamental corporate philosophy of "cultivating professionals."
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥228 18,503,932 shares ¥4.218 billion 4.9% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥2.00 0.9% ¥20.27 11.2x ¥236.95 1.0x
* Stock price as of close on November 18, 2015. Number of shares outstanding as of most recent quarter end do not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating Income Ordinary Income Net
Income
EPS Dividends
March 2010 23,991 623 442 40 2.20 17.00
March 2011 24,575 465 283 -244 - 20.00
March 2012 22,578 -606 -530 -799 - 0.00
March 2013 20,999 136 377 977 53.63 0.00
March 2014 20,526 1,034 1,299 816 44.68 1.00
March 2015 19,537 140 404 208 11.24 1.00
March 2016 Est. 19,961 630 594 375 20.27 2.00
* Estimates are those of the Company.
 
We present this Bridge Report reviewing the first half of fiscal year March 2016 earnings results and other information about TAC.
 
Key Points
 
 
 
Company Overview
 
TAC Co., Ltd. is known as the "TAC, The Certification School" where university students and working people come to study to increase their chances of passing tests for various certifications and qualifications. The Company operates schools throughout Japan that educate students and adults in academic fields necessary to pass tests to become Certified public accountants, Licensed tax accountants, Real estate appraisers, Certified social insurance and labor consultant, Attorneys-at-law, Judicial scriveners and other professional occupations. In addition, TAC also provides various training programs for corporate clients and deals in publishing as well.
 
 
<Corporate History>
TAC was established in December 1980 as a school providing instruction to people seeking to obtain certifications and qualifications through examinations, including courses for the Certified public accountant, Bookkeeper, and Licensed tax accountant examinations. In October 2001, TAC listed its shares on the Over The Counter Market, and later moved its shares to the Second Section of the Tokyo Stock Exchange in January 2003 and then to the First Section in March 2004. TAC acquired KSS Co., Ltd. (Formerly known as Waseda Management Publishing), which conducts certification and qualification acquisition support services including the provision of preparatory courses for Attorney, Judicial scrivener, Patent attorney, Level-1 Civil service, Special personnel of the MOFA related examinations, in September 2009. Through the addition of this company, TAC has been able to fortify its strengths in the accounting realm by adding certification preparatory courses in the legal realm, and to round out its service lineup with courses in the public officer realm. In December 2013, the Company formed a collaborative agreement that included sharing of capital with Zoshinkai Publishers Co., Ltd.for work in the development of a correspondence course education service for elementary, junior and senior high school students. Furthermore, other M&A activities were conducted in June 2014 to gain entry into the medical claims processing realm.
 
<Strengths>
(1) Detailed Response to Changes in Examination System and Revisions of Laws and Regulations
Since the founding of the Company, TAC instructors have made revisions to the text materials used in its courses every year, and this ability to respond to changes in examination system and revisions of laws and regulations is a distinguishing feature of TAC and the reason for its popularity among students. For a company like TAC with sales approaching ¥20.0 billion, absorbing the costs of updating text materials on an annual basis is possible. However, new entrants and smaller players in the market have a much more difficult time absorbing the costs of updating teaching materials. Other strengths of TAC include its know-how accumulated over the years, which has enabled the highest productivity.
 
(2) Full Scale Lineup and Aggressive Course Development
TAC has risen to become the top player in the industry through its aggressive efforts to develop courses in new realms, including those targeting university students, and it has become the first company within its industry to list its shares. Along with the acquisition of W Seminar's certification and qualification acquisition support business in 2009, TAC has been able to fortify its weakness in the realms of legal and Public officer related courses. Consequently, the Company now boasts of a strong business model comprised of the three pillars of courses, namely for Legal professions, Public officers, and Accountants (which include Certified public accountants, Licensed tax accountants and Bookkeepers), as well as other courses of great variety.
 
(3) Providing Innovative Services with a Focus upon Students
Innovative services are yet another strength of TAC. TAC was the first school in the certification and qualification acquisition support services market to enable students to choose their own educational media and instructors. This corporate focus upon satisfying the needs of students is reflected in the quality of the text materials offered and has contributed to the establishment of a strong brand reputation as "TAC, The Certification School."
 
 
 
ROE deteriorated significantly compared to the fiscal year before the previous year due in part to declines in margin and asset turnover. Now, the most important issue is whether "a full-fledged earning recovery" can be realized going forward. The average ROE of 10.5% since 2002 is relatively high.
 
 
First Half of Fiscal Year March 2016 Earnings Results
 
Regarding Sales
Students applying for courses are required to pay tuitions at the time of their initial application (TAC calls these fees as prepayment adjusted sales or cash-based sales), which are then booked on the balance sheet as a liability under the title "prepayments received." These prepayments received are then written down and booked as sales in each month that educational services are provided to the student (TAC calls these sales post prepayment adjusted sales or actual sales). While sales booked on the income statement are "actual sales", the actual indicator of the sales conditions of the Company in the term are considered to be the "cash-based sales" (The fact that cash and equivalents are influenced strongly by the cash-based sales is a characteristic that is shared with companies that take orders) and they are deemed to be a leading indicator for actual sales. Therefore, TAC management identifies this "cash-based sales" as a key management indicator.
 
Regarding Seasonal Characteristics
Examinations for the majority of certification courses are held from the second (July to September) to third quarters (October to December), and core courses, especially those for Certified public accountants and Licensed tax accountants, fall into the time frame for examinations in the following year. At the same time, all courses fall into the fourth (January to March) and first quarters (April to June).
Despite an increase in cash-based sales and actual sales during the second and third quarters, prepayments received are written down and booked depending upon enrollment period and gross margin is profoundly influenced because of the booking a fixed level of expenses every month. In the fourth and first quarters, these prepayments received are then written down and booked as sales in each month, tending to cause gross margin to increase.
 
 
First Increase in Sales in Five Years, Profits Rise by Double Digits on Back of Flat Costs
Cash-based sales rose by 8.1% year-on-year to ¥10.472 billion, and actual sales rose by 2.3% year-on-year to ¥10.596 billion. Favorable trends in the finance, accounting, financial service and real estate related courses combined with contributions from the medical care and social welfare related curriculum gained through the acquisition of two companies in the Osaka region, which became subsidiaries, to boost sales.

Flat trends in cost of sales, and sales, general and administrative expenses, including rent and labor expenses, allowed operating to rise by 33.5% year-on-year to ¥1.052 billion. In non-operating income, a ¥16 million profit on investment securities and ¥37 million in interest payment were recorded and contributed to a 12.1% year-on-year increase in ordinary income to ¥1.046 billion, and a 12.3% year-on-year rise in net income to ¥0.644 billion. Based upon these favorable earnings trends, the first half earnings estimates had been revised upwards. Also, a midterm dividend of ¥1.00 per share was reinstated for the first time in five years.
 
 
<Personnel Education>
Cash-based sales rose by 5.7% to ¥6.656 billion. Sales had been depressed in the wake of the hike in the consumption tax during the previous first half, but they rose by a large margin in the current first half. And while numerous courses recorded gains in sales compared with the previous first half, courses for Certified public accountants, Public officers, and Registered real estate brokers certifications recorded particularly large gains, along with strong sales of other courses. At the same time, ongoing cost reductions including efforts to reduce teaching fees, text material creation outsourcing expenses, and rent were effective in reducing operating expenses by 2.7% year-on-year to ¥6.334 billion. These lower costs allowed cash-based operating income to improve by a large margin to a profit of ¥322 million, compared with a ¥213 million operating loss in the previous first half. The gap between classroom courses and correspondence courses is narrowing as they accounted for 58.5% and 41.5% of sales respectively during the first half, compared with 63.9% and 36.1% four years earlier.
 
<Corporate Training>
Cash-based sales and operating income rose by 6.1% and 13.8% year-on-year to ¥2.355 and ¥0.710 billion respectively. Company training, which accounts for over half of the sales of the corporate training segment, rose by 8.2% on the back of strong orders for training of those who have received provisional job offers, newly hired staff, training by job category and other forms of training on the back of increases in new staff hiring brought on by a recovery in the economy and a growing number of companies seeking to strengthen their training of existing staff. Also, the number of companies outsourcing personnel evaluations is growing. By course, sales of Registered real estate broker and Architect courses rose by large margins of 14.0% and 103.0% year-on-year respectively, and Business school and Securities analyst courses grew by 23.4% and 7.8% year-on-year respectively. At the same time, sales of Financial planner and Licensed condominium manager fell by 12.0% and 18.3% year-on-year respectively. Sales derived from collaborative schools in Accountant, Registered real estate broker and Public officer courses rose by a large margin from the previous first half, which were depressed by the rush to make payments ahead of the implementation of the consumption tax hike, allowing overall sales to rise by 4.4% year-on-year. Contents provided to regional vocational schools are also on the rise.

With regards to seminars held within college campuses, courses for Bar Examination and Administrative scrivener certification declined by 15.3% and 1.6% year-on-year respectively, but courses in Bookkeepers, Accountants, and Public officers rose by 16.6%, 33.6%, and 12.7% year-on-year respectively and allowed overall sales to rise by 7.0% year-on-year. The recovery in the economy contributed to a decline in training programs consigned by local government by 21.0% year-on-year. Furthermore, sales of the tax accounting software "Mahojin", which was in special demand for updating in response to the hike in the consumption tax last year, fell by 9.2% year-on-year.
 
<Publishing>
Sales and operating income of the publishing segment rose by 24.7% and 61.7% year-on-year to ¥1.148 and ¥0.393 billion respectively (Because there are no prepayments made in this segment, there is no separate category for cash-based sales and all sales are actual sales.). TAC Publishing published an easy to read and understand full color publication (For Bookkeeper, Registered real estate broker, Financial planner courses, etc.) for the first time, in addition to its timely publications for the "My Number" Social Security and Tax Number System. In addition, TAC will begin operations of a special website for support of the impending changes in the Bookkeeper certification system in 2016 as part of the daily bookkeeping curriculum, and other measures as part of the curriculum aside from the traditional printed publications. Most of the courses overall are seeing favorable trends, with particularly strong growth in bookkeeping, real estate brokerage and financial planner. W Publishing is seeing strong demand for publications regarding revisions in the corporate law and commercial trademark registration laws, and sales of Bar Examination and Judicial scrivener related publications also grew. As part of the sales promotion strategy, information is transmitted to bookstores through the "TAC Teikibin (Regularly scheduled mail)" once a month, and efforts to expand sales include the holding of "TAC Group Certification Festival" to fortify collaboration with major bookstores, direct sales sties (Cyber book stores) and Amazon, and "Dokugaku Dojo" (Original courses for individuals studying). And in August, a facility was established in Osaka as part of efforts to strengthen marketing in the Osaka and surrounding regions. The improvements in product quality and strengthening in sales capabilities has contributed to improvements in the operating conditions including declines in product returns.
 
<Manpower Business>
Sales and operating income rose by 25.7% and 127.0% year-on-year to ¥342 and ¥35 million respectively. Medical industry manpower services benefited significantly from the contribution of the two Kansai-based companies: Iryojimu Staff Kansai Co., Ltd. and Kubo Iryou Co., Ltd. for full 6-month (Compared with its contribution of only three months during the previous first half). In addition, a capital and business alliance was formed with TMMC Co., Ltd., which conducts medical fee consultation services and cloud-based medical expense statements check services, in July 2015 to expand earnings.
 
 
<Market Overview>
The number of people applying for examinations for various certifications and qualifications during 2014 declined by 8.3% year-on-year to 2.510 million, marking the fourth consecutive year of declines after peaking at 3.086 million in 2010. However, TAC expects this decline to bottom out shortly. An overview of the main certification markets is provided below.
 
<Accounting Related>
The number of examination applicants in business skills and bookkeeping at all levels declined by 9.1% year-on-year. Despite the continuing decline in the number of examination applicants for public accountants and the most recent decline of 17.8% year-on-year, demand for certification and qualification examinations is anticipated be positively influenced by the shortage of staff at auditing companies and in the accounting industry overall being seen currently. The number of applicants for tax accounting examinations has been in a prolonged downturn, and the number of examination applicants declined by 9.9% year-on-year.
 
<Law Related>
The number of examination applicants for the preliminary Bar Examination increased by 12.1% year-on-year, marking the third consecutive year of increases since this examination was launched in 2011.
 
<Public Officer Related>
Despite increases in the number of applicants to become public officers since 2009 in the aftermath of the "Lehman Shock", applicant numbers declined during 2014 due to increases in alternative employment opportunities arising from Prime Minister Abe's economic stimulus measures. The number of applicants in comprehensive and general government worker courses in 2014 declined by 2.7%, and upper level regional government worker courses declined by 4.6% year-on-year due to a decline arising from increases in alternative employment opportunities associated with improvements in the economy. Applicant numbers for teaching curriculum certification examinations are trending steadily at about 150,000.
(The trends of TAC's services are listed below)
 
Finance and Accounting
Actual sales rose by 5.7% year-on-year to ¥1.556 billon. With regards to the certified public accountants, major corporate auditing firms have started aggressive hiring from last year and almost all people who have acquired CPA certification are currently being hired. The environment for short answer type tests, which are administered two times a year, has recovered in recent years with a decline in the number of people taking the test falling by 690 year-on-year to 10,180 during fiscal year 2014, compared with the declines of several thousand during recent years. Furthermore, strong demand for new applicants for courses rose by a large margin from the previous year and allowed cash-based sales to rise by 18.7% year-on-year. Sales of the bookkeeping certification course remained basically in line with the previous year's levels, but strong demand for the "Sukkiri Wakaru", "Minna Ga Hoshikatta!", and "Yoku Wakaru" series of bookkeeping publications allowed cash-based sales to rise by 9.0% year-on-year.
 
Management and Taxation
Actual sales declined by 3.2% year-on-year to ¥2.199 billion. The number of applicants of the certified public accountant examination continues to decline and fell by 5.5% year-on-year to 47,145 during fiscal year 2014 (National Tax Agency quick estimation). Furthermore, a two week delay in the implementation of the examination compared with last year has contributed to delays in people applying for certified public accounting courses. Due to these developments, cash-based sales declined by 1.3% year-on-year. The number of applicants to attend examination preparatory courses remained low due to the high passage rates of the preliminary examination for Small and Medium Enterprise Management Consultant, but effective summer sales promotional campaigns allowed sales of courses to rise by a slight margin from the previous year. At the same time, favorable sales of examination preparatory publications also contributed to a 3.1% year-on-year increase in cash-based sales. As a result of these developments, cash-based sales in the same realms remained in line with the previous year's levels, but large declines in prepayments contributed to a decline in actual sales.
 
Financial Service and Real Estate
Actual sales rose by 13.0% year-on-year to ¥1.751 billion. On the back of the economic recovery and highly active real estate market, the real estate segment trended favorably. Consequently real estate brokerage, real estate appraisal, condominium management, and architect courses rose by 27.2%, 48.9%, 4.3%, and 65.0% year-on-year respectively. At the same time, sales of courses for securities analysts and business school rose by 19.1% and 61.7% year-on-year respectively. And while sales of financial planners declined during the first quarter, a recovery during the second quarter allowed sales to rise by 1.9% year-on-year during the first half.
 
Law
Actual sales declined by 6.1% year-on-year to ¥902 million. The "4A Basic Course" is very popular amongst a wide range of applicants including first timers and people with experience in sitting for the Bar Examination, the number of applicants remained at similar levels to the previous year (12,622) at 12,543. In addition, optional products for the preparatory exams were popular and demand remained strong, allowing cash-based sales to rise by 5.6% year-on-year. In addition, judicial scrivener courses remained in line with the previous year's level, and favorable sales of W Publishing's "Goukaku Kakumei" (Exam Passage Revolution) allowed cash-based sales to rise by 11.7% year-on-year. At the same time, weak demand for patent attorney and customs officer related courses caused cash-based sales to decline by 10.9% and 15.7% year-on-year respectively.
 
Public Officer and Labor
Actual sales rose by 1.0% year-on-year to ¥2.752 billion. The number of participants in the newly introduced "Advanced Social Insurance Labor Consultant Course" for people with examination experience and the "Comprehensive Social Insurance Labor Consultant Wide" and "Comprehensive Social Insurance Labor Consultant Wide Plus" courses for beginners trended strongly and allowed cash-based sales to rise above the previous year's level. However a large decline in prepayment adjustment amount caused actual sales to fall by 11.3% year-on-year. On the back of an increase in applicants for the National Career Test Track applicants, comprehensive government worker and specialized field worker courses saw a recovery in demand. Furthermore, the recovery in hiring by private sector companies has led to a decline in the number of people seeking employment as public officers in central and regional government bodies. However the fortification of new courses designed to secure sales allowed cash-based sales to rise by 8.4% year-on-year.
 
Information Technology and International
Actual sales rose by 0.4% year-on-year to ¥711 million. With regards to information processing courses targeting individuals, IT passport courses fell below the previous year's levels, but courses in IT strategist, applied information and others saw favorable demand due to revisions in the test guidelines making to make them easier to take than before. At the same time, corporate training courses for corporate clients recorded a slight decline, contributing to a 1.9% decline in cash-based sales of courses overall. Furthermore, CompTIA courses trended favorably on the back of strong demand from corporate training. Cash-based sales of courses for the United States certified public accountant, tax accountant, certified management accounting (USCMA), TOEIC and other international certification tests rose by 13.7% year-on-year, but actual sales declined by 3.4% year-on-year due to a drop in prepayments.
 
Medical and Human Service
Actual sales rose by 88.7% year-on-year to ¥104 million. With regards to the medical human resources services, Iryojimu Staff Kansai Co., Ltd. has acquired new medium sized clinics as clients, and TAC Iryo Jimu Staff Co., Ltd. has implemented efforts to differentiate its services from its competitors as a means of expanding earnings. In addition, a capital and business association has been formed with TMMC, which provides medical fee claims tasks consultation services and medical expense statements check services. Also, TAC has been able to steadily expand the number of students of its new courses established in January 2015.
 
Others
Sales (Cash-based and actual sales are the same) rose by 0.6% year-on-year to ¥616 million. Sales of "Mahojin" tax filing software declined by 9.2% year-on-year due to the extraordinary demand caused by the tax hike and corresponding revision of "Mahojin". Furthermore, miscellaneous income declined by 5.5% year-on-year. At the same time, TAC Professional Bank Co., Ltd., which performs human resources business, saw advertising sales rise from the previous year on the back of strong demand for human resources in the realms of accounting and tax accounting, but headhunting related and human resources dispatching sales trended weakly.
 
 
The number of students rose by 5.7% year-on-year to 126,295 as of the end of the first half of fiscal year March 2016 due in part to the weakness caused by the rush in to beat the consumption tax in the previous first half. The number of individual and corporate client students rose by 1.6% or 1,349 and 15.4% or 5,430 year-on-year to 85,565 and 40,730 students respectively. Amongst courses for individual and corporate students, residential property transaction, architect, securities analyst, and business school courses rose by large margins of 8.4%, 45.0%, 47.3% and 36.8% year-on-year respectively. At the same time, bookkeeping certification, Small and medium enterprise management consultant, Real estate appraiser, Condominium supervisor, information processing, CompTIA and other courses also recorded increases in students. At the same time, students of Certified public accountant, Certified social insurance and labor consultants, Judicial scrivener, and Administrative scrivener courses declined by 9.3%, 7.2%, 10.6% and 5.5% year-on-year respectively. Corporate students of correspondent course training, on-campus seminars, and collaborative schools rose by 24.6%, 16.8% and 3.2% year-on-year, while consigned training declined by 20.8% year-on-year due to the recovery in the economy.
 
 
Cash and equivalents rose by ¥1.399 billion from the end of the previous fiscal year. Investment securities rose by ¥284 million, contributing to a ¥1.684 billion increase in total assets to ¥22.989 billion at the end of the first half. While payables declined by ¥112 million, interest bearing liabilities rose by ¥973 million and contributed to a ¥1.073 billion increase in total liabilities to ¥17.990 billion. Net assets rose by ¥610 million to ¥4.998 billion on the back of an increase in retained earnings. Consequently, equity ratio rose by 1.1% from the end of the previous fiscal year to 21.7%.
 
 
The increase in profits caused operating cash flow to turn to a net inflow in the current first half from a net outflow in the previous term. At the same time, acquisition o investment securities contributed to an expansion in the net outflow of investing cash flow. Consequent to these developments, free cash flow turned from a large net outflow in the previous first half to a net inflow during the current first half. An increase in long term debt contributed to an expansion of the net inflow of financing cash flow. Consequently, cash position rose.
 
 
Fiscal Year March 2016 Earnings Estimates
 
 
No Change to Earnings Estimates, Large Rise in Profits on Back of Small Increase in Sales
TAC maintained its existing full-year earnings estimates, which call for cash-based sales to rise by 8.0% year-on-year to ¥20.361 billion. Due to the nature of the business, it is critical to expand sales in order to maintain a network of facilities of certain scale. Therefore, efforts are being implemented to expand courses in financial service, real estate, teacher's certificate exam courses and to develop new courses and strengthen alliances to increase sales. In addition, investments for growth (New business development) and cost reduction measures will also be conducted on an ongoing basis. Operating income is expected to grow by 348.2% year-on-year to ¥630 million. This large increase in profits is expected to be derived from the disappearance of ad hoc costs associated with the acquisition of the headquarter building, reductions in rent and a subsequent large decline in sales, general and administrative expenses. Because the third quarter is expected to be a period for anticipatory investments and due to uncertainties regarding the sales trend, TAC has adopted a relatively conservative estimate for second half earnings. Dividend payment is expected to be raised by ¥1 to ¥2.00 per share, for a payout ratio of 9.9%.
 
(2) Medium- to Long-Term Strategy
As described in the previous report, efforts are being made to expand the billing services of Online School Co., Ltd. for medical manpower business (Through alliance with TMMC Co., Ltd.), and to expand architect courses and language business. Amidst these efforts, new Architect courses were launched in November 2011 with highly qualified instructors using original teaching materials, and curriculum with a priority goal of preparing students for passing their exams. At the same time, superior pricing over competitors is another factor behind the favorable trends in applicants. The active real estate market is expected to be a tailwind for further expansion in sales. Moreover, TAC will also aggressively pursue M&A projects as part of its investments for future growth from which synergies can be achieved.
 
 
Conclusions
 
The favorable earnings performance during the first half is reflected by the fifth consecutive term of sales growth and double digit profit growth, as well as the payment of a midterm dividend for the first time in five terms. In addition, the business restructuring has been nearly completed during the previous term and the decline in the number of course applicants has bottomed out and is now increasing. However, the share price continues to languish with recurrence of the price book-value ratio (PBR) trending below 1. This appears to be a reflection of the lack of confidence of investors in the sustainability of the earnings recovery. How quickly the aggressive M&A and alliance efforts will begin to contribute to earnings should be watched closely.
 
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
Copyright(C) 2016 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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