Justsystems Corp (4686)

A "mini Keyence" trading at 5x EV/EBIT

Continuing on our hunt for “high quality take-private” candidates in Japan, here is a unique software company called Justsystems - or what I’d like to call a “mini-Keyence”!

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Why is this interesting?

Justsystems has a long history. It was one of Japan’s leading software companies at the dawn of the PC revolution in the 1980’s, having developed Japan’s first word processing software. Since then, the company has expanded its product offerings to include educational and business software.

What makes Justsystems unique is that its “parent” company is Keyence Corp, which acquired a 44% stake in 2009. Readers are probably familiar with Keyence, a powerhouse in factory automation and one of Japan’s greatest compounders (see my previous write-up on Keyence here). Notably, Justsystems is the only acquisition that Keyence has made in its 50-year history!

Keyence has significantly influenced the culture and strategy at Justsystems, a key factor in the company's success that I believe is underappreciated by investors. This is a key topic that we will explore in this write-up.

Despite being one of the best-managed and most profitable Japanese software companies, Justsystems is a hated stock. Many investors consider it a value trap. However, I’m bullish and believe the combination of quality and valuation here is compelling.

• The downside should be limited given the low valuation, strong balance sheet, and sticky revenue centered around subscription-based educational products.

• While topline growth has been weak in the last several years, I don’t think investors should write off the company’s ability to grow. New products like Smile Zemi for high school students and JUST.DB, a no-code database software, have strong potential. At this valuation, growth is essentially “free.”

• Increasingly I also envision a scenario where Keyence could take the company private, which would serve as a catalyst.

A unique shareholder list

I don’t usually begin my write-ups this way, but in the case of Justsystems, the shareholder list is among the most interesting and unique I’ve encountered in Japan (see below). So let’s talk about this first.

As previously mentioned, the most important shareholder is Keyence. There is a lot to discuss about Keyence, and we’ll delve into this later. However, Keyence is not the only interesting name on the list. I want to draw your attention to two other names: Mr. Shigeta Yasumitsu and Hikari Tsushin Corp. Shigeta is the Founder and Chairman of Hikari Tsushin, so you can consider these two as one entity.

Hikari Tsushin has sometimes been called the “Berkshire Hathaway of Japan” due to its substantial investment portfolio of public equities. Shigeta is a self-proclaimed admirer of Warren Buffett. The last time I checked, his company owned 1,127 shares of Berkshire Hathaway Class A stock, valued at over $700 million, making Hikari Tsushin the 15th largest shareholder of Berkshire!

Notably, Shigeta personally owns 7.3% of Justsystems (valued at 13 billion yen), separate from Hikari Tsushin’s 4.3% stake. Even for a billionaire like Shigeta, this is a significant position in a single stock, and by far the largest in any publicly listed company outside his own. There must be a very high degree of conviction to own such a large stake in a company which he has no control over.

With the involvement of Keyence and Hikari Tsushin/Shigeta, there is clearly some very smart Japanese money backing Justsystems. Despite this, the company has not generated much interest from foreign investors. Why?

• The company is notoriously secretive, with investor disclosure being among the worst I’ve seen in Japan (even worse than Keyence!)

• Much like Keyence, the company also hoards cash and pays a very small dividend despite the business requiring little capital to operate.

• While historical growth has been impressive (operating profit has grown fivefold over the last decade), critics point to flat topline growth since 2021.

• My impression is that foreign investors tend to favor newer, high-growth SaaS companies, relegating Justsystems to a legacy software name.

In my view, these explains the company’s low valuation, despite being a well-managed and profitable company.

A “mini Keyence”

Early history

Founded in 1979, Justsystems was one of the hottest software companies at the dawn of Japan’s PC revolution.

Back in the days, it was far from obvious how you would turn a QWERTY keyboard into Japanese characters. Justsystems pioneered this field by developing ATOK, the first computer input method for the Japanese language, in 1982. This was followed by Ichitaro, the word processing software incorporating this technology, in 1985.

By the early 1990s, Ichitaro had captured the majority of Japan’s word processor market share. However, the landscape shifted when Microsoft introduced Windows 95. Microsoft Word was bundled for free with the OS, leaving Justsystems struggling to compete with its standalone word processing software.

Recognizing that it was losing to Microsoft in the word processing software market, the company made a bold bet to diversify into database software in 2005. A lot of investment went into the new database product, but unfortunately, it failed to gain traction. The situation worsened with the Global Financial Crisis in 2008, plunging the company into financial trouble.

Enter Keyence