AIN: Leader in Fragmented Pharmacy Dispensing Business in Japan

Kisalaya Singh of ANYA Investment Partners presented her in-depth investment thesis on AIN Holdings (Tokyo: 9627) at Asian Investing Summit 2018.

Thesis summary:

AIN Holdings is the leader in the highly fragmented pharmacy dispensing business in Japan. Dominated by 60,000+ one-man and small-chain pharmacies, the sector appears poised for consolidation, driven by a combination of regulatory changes and ageing one-man store owners without heirs. AIN is ideally placed to be the sector consolidator with its long history of growth driven by astute organic expansion and M&A. Founder and president Kichi Otani is a disciplined capital allocator and operator who has compounded book value and earnings at 18+% annually over the past ten years, while earnings ROE of 14+%, despite a net cash balance sheet. With an equity stake of almost 9%, Otani remains invested in the continued growth of the company.

A long growth runway is available for AIN to increase revenue market share from 3% currently, by acquiring small chains and setting up more efficient large-scale pharmacies. Incremental ROI of M&A is high, driven by an ability to pay acquisition multiples as low as 5.5x EV/EBITDA and improve the operating margin of acquired businesses. Recently trading at a “fair” multiple of 8.6x EV/EBITDA, the market appears to be cognizant of AIN’s prospects for M&A growth, but not fully appreciative of recently allowed large-scale pharmacy growth. The market may also overestimate regulatory uncertainty, which injects volatility in the stock price. Primarily a revenue and earnings growth story, AIN also has the kind of high ROE, healthy cash generation, and consistent growth that have been rewarded by higher trading multiples in Japan.

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About the instructor:

Kisalaya Singh serves as managing partner of ANYA Investment Partners, a value-based investment partnership primarily focused on investment opportunities in Asian companies. Kisalaya’s previous work experience includes Segantii Capital Management, FrontPoint, The Blackstone Group, and Merrill Lynch. He holds an MBA from IIM Ahmedabad.