Plus Alpha Consulting (4071 JP) Sep-24 Earnings Update
I feel less bullish
Plus Alpha Consulting's (PAC) full year results show signs of revenue growth slowing down at its core product, Talent Palette. Until the management demonstrates the ability to re-accelerate Talent Palette's growth, I think its share price will remain at the current level. One way for the company to unlock its value could be to sell to a larger back office software company - Money Forward (3994) comes to my mind - but that scenario is unlikely unless an activist investor gets involved.
Talent Palette accounted for 55% of the fiscal year ending (FYE) September 2024 revenue but around 70% of EBIT (before corporatewide cost and goodwill amortization, which is required under J-GAAP). While PAC's Marketing Solution business has been growing at a single digit rate, Talent Palette revenue grew by 45% and 35% year-over-year (YoY) in FYE September 2023 and September 2024, respectively. However, there are signs that Talent Palette is facing challenges:
Monthly recurring revenue (MRR) YoY growth has been steadily slowing down as the table below shows. Quarter-over-quarter MRR growth has been around Y40mn over the last nine quarters.
Originally, PAC targeted Y6.5bn of EBIT for FYE September 2025, but it revised down to Y5.6bn. This is disappointing given PAC's recent 10% price hike for Talent Palette, effective April 2024, which I believe was not initially included in the guidance.
PAC used to disclose rolling five year EBIT guidance but this was withdrawn. Revenue guidance was revised upwards but this is mainly due to acquisitions, as mentioned below.
During the first half earnings presentation, PAC management mentioned the launch of Talent Palette "Lite" to cater small-size companies (those with fewer than 200 employees). I understand that PAC aims to upsell after landing a customer, but since management mentioned redundant sales resources due to prolonged sales cycles, I view this pivot as an indication that management may not have been able to drive Talent Palette sales as effectively as expected.
PAC is making tuck-in acquisitions to bolster Talent Palette's product appeal. Strategically, I think this could be beneficial, provided these additions contribute to Talent Palette's MRR growth—a trend that, so far, has not materialized.
While PAC may be able to add Y40mn of Talent Palette MRR every quarter, the law of large numbers will inevitably slow Talent Palette's growth potentially to the low 20% range in FYE September 2025 and the high-teens in the following year. The shares were sold down sharply after the recent earnings announcement and now trades at 11x EV/Sep-25e EBIT (per management guidance) and 18x P/Sep-25e E. It is an undemanding valuation for a company that is still expected to grow profits at 20%+ this year. However, I believe growth investors may be reluctant to invest until it sees Talent Palette’s sustainable - perhaps three to five years - growth rate (currently, they just see Talent Palette slowdown). It appears there may be issues with Talent Palette's go-to-market strategy, as the sales force expansion in 2024 did not have the anticipated impact on the top line.
Furthermore, I do not see the valuation as sufficiently attractive for value investors. This is why I believe PAC's share price will be stuck around Y2,000 for the time being. Since Talent Palette is the best human resource management software in Japan, I think a viable strategy for PAC is to sell itself to a company with a robust distribution network, that is Money Forward (3994). Although Money Forward's share price declined following its own earnings announcement in October, it could offer a 50% premium to PAC's share price (around Y1,600 as of this writing) and still achieve immediate accretive value from a P/S standpoint, provided Money Forward's share price recovers to its pre-earnings level. In addition, PAC could significantly enhance Money Forward's bottom line. However, it seems unlikely that PAC management would pursue a sale, especially given the absence of activist investor involvement, making this scenario improbable.
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