The transaction will also expand U-Next’s business portfolio to include comprehensive credit purchase brokerage and settlement agency services. As per a recent news release, U-Next has postponed the effective date for NetMove Corporation's business succession to August 1 from Feb. 1, 2025., owing to delay in acquiring necessary approvals.

U-Next, headquartered in Tokyo, Japan and founded in 1961, is a Japanese company that offers entertainment services, telecommunications services, electric power distributions and outsourced business services. The company mainly operates through five segments: Content Distribution segment, which contributed 33% of FY24 sales; Store Services business segment, 21%; Communication business segment, 19%; Energy Business segment, 18%; and Business Systems segment, 9%.Geographically, Japan contributes to 90% of sales, while overseas markets make up the remaining 10%. The company changed its name to ‘U-NEXT HOLDINGS Co., Ltd.” in April 2024. Listed on the Tokyo stock exchange in 2015, U-Next has become a key player, employing 5,344 members.

Sales witnessing all-time quarterly high

U-Next has delivered consistent performance over the past 5 years, registering a revenue CAGR of 13.2% to reach JPY327bn in FY24, driven by store service business, which was introduced in FY21 and contributing 21% of total sales in FY24. Additionally, Content distribution services grew at a CAGR of 26%, while the contribution jumped to 33% in FY24, up from 27% in FY19. EBITDA registered a CAGR of 17.6% over the same period to reach JPY39bn in FY24, aided by a margin expansion of 208 bps to reach 12% in FY24. Positive bottom-line performance aided in cash generation, leading to an increase in cash position to JPY52.7bn as of FY24 end, from JPY20.6bn as of FY19 end.

U-Next fared better compared to its peer Rakuten Group Inc., demonstrating superior EBITDA margin performance over the last five years. Rakuten’s revenue grew at a CAGR of 13.5%, reaching JPY2,071bn in FY23, slightly higher compared to U-Next’s revenue CAGR of 13.2%. However, the EBITDA margins for Rakuten contracted by 758bps, reaching 6% in FY23, which is approximately half of U-Next’s reported EBITDA margin.

Recently, the group reported encouraging 1QFY25 results, achieving new record highs for quarterly sales and net income. Net sales increased 25% YoY to JPY91,928mn, driven by top-line growth across all business verticals. Content Distribution and Store & Facility Solutions grew by 19% YoY each registering net sales of JPY30,572mn and JPY25,623mn respectively. SG&A continued with its downward trend, remaining below 30% of sales to reach 25.6%. The operating income rose by 10% to reach JPY8,251mn, impacted by a 110 bps decline in margins to 9%.

Segment revision aligning with business goals

U-Next plans to revise its segments starting from FY25 onwards, planning to operate with 4 segments, by integrating the Store Service segment and Business System segment into a new segment, Store & Facility Solutions. The Group also plans to combine the Communications segment and Energy segment to form the Communication & Energy segment. Further, the company plans to launch a new segment of Financial, Realty & Global in order to provide rent guarantee, payment services and real estate operations. The Content Distribution segment would continue to steer the group ahead with a robust base of 4.5mn subscribers. Additionally, the stores and facilities business is well supported with stores at 830k and facilities at 30k, providing comprehensive solutions.

The company expects revenue to grow to JPY360bn in FY25. U-Next anticipates generating JPY31bn of operating profit by maximizing group synergies and strengthening its service creation capabilities, growth potential, and profit generation capabilities. Further, U-Next anticipates net profit to be JPY16.7bn.

Attractive valuation levels

The company is currently trading at a P/E ratio of 19.5x, significantly lower than the global peer average of 70x. The company is also trading lower compared to the 8-year historical average of 26.1x. Additionally, valuation through the EV/EBITDA approach also reflects a lower valuation for the company at 8x, based on an estimated FY25 EBITDA of JPY43bn, compared to the historical 8-year average of 10.8x and global peer average of 44.7x. On the other hand, peer Rakuten is trading at a negative P/E of 15x.

U-Next’s share price has increased by over 27% in the past one year. The share price has gained increased traction following the release of 1QFY25 results on January 14, 2025, witnessing gains of around 13%. Out of four analysts covering the stock, 2 have a “Buy” rating, 1 has an ‘Outperform’ suggestion, and 1 recommends ‘Hold’ for an average target price of JPY1,844, indicating a potential decline of around 1% from the current market price. The recent run-up in prices indicates that the target has already been met, however, any correction in the near term could provide a decent opportunity for investors to evaluate the company.

Overall, the company appears poised for long-term growth backed by its record financial performance, investor interest in the company, and strategic acquisitions. Moreover, realignment and revision of business segments put the company on the growth path for the future. Throughout the previous six quarters, U-Next has surpassed the consensus revenue estimates, depicting resilience in business performance. However, some of the major risks include changes in customer preferences, contract cancellations, and economic stagnation impacting the store services business.