Description

Prestige International is a Japanese call center operator (don’t click away just yet!) with solid growth potential and the highest quality among peers, in my opinion. Shares have fallen about 37% from an all-time-high reached in 2020, even as sales and profits have continued to advance. The stock is now at a very attractive level.

Call centers fall into two categories - outbound and inbound. Outbound is your typical telemarketer company. This can be highly profitable, if disreputable, business. Inbound, the category Prestige falls into, provides call centers as a business process outsourcing service to various industries including insurance and human resources. This is a steady, stock business model categorized by long-term relationships with clients. 

Prestige is uniquely positioned in the industry with its extraordinarily long-tenured workers, which allow it to take on high value-added (and high-priced) work, as well as its vertical integration strategy. For example, they not only provide auto insurers with phone operators for when someone gets in an accident, but they also own a fleet of tow trucks.  This vertical integration strategy embeds them deeper with their customers, reducing the risk of contract cancellations. 

The company is so well-liked by its customers that its main constraint on growth is supply side, not demand side. They continue to invest in building new call center campuses in the North of Japan to meet customer demand. 

10 Year Stock Price and EV/EBIT (T12m) Trend

Why Does This Opportunity Exist?

I see a few reasons why this opportunity has arisen. 

1) Covid-19 vaccine appointment call centers were a huge profit driver for the last 2 years. With this business disappearing this year, profit growth is much slower than normal (but still positive). 

2) Someone is selling. This stock was well-loved by growth investors for its nearly metronomic 10% annual growth. I hear that many growth funds have faced redemptions recently. 

3) AI - there is a fear that AI will spell the end of the call center business.

My response to each 

1)  Investors feared negative OP growth this year, and yet the company is targeting 4.6% growth. From next year, normal growth should resume, so the worst has now passed. 

2) The worst of the growth investor selling seems behind us. 

3) This is the ongoing existential threat. I think Prestige is in the best position because it is handling emergency situations and also is diversifying beyond call centers. When a driver gets in an accident and is in a panic, they do not want to be talking to a computer. That kind of bad experience is exactly the type of thing that would prompt someone to switch insurers. 

Prestige traded at a 20x EV/EBIT multiple from 2017-2020. I don’t know if it is worth 20x, but it is not worth 6x! 

Comps

There are now 3 listed call center operators, with Relia (4708) recently bought out by Mitsui & Co (8031) at a 7.8x EV/EBIT multiple earlier this year. 

BellSystem 24 was controlled by Bain before listing in 2015. It is probably the most professionally run of the listed call centers, with extremely tight cost controls and heavy use of leverage. Their strategy relies on high turnover workers in city centers to staff call centers. The high ROE is commendable, but growth has been relatively slow. OP is set to decline this year with high margin Covid-19 work falling off. 

Transcosmos is an interesting company as it has historically been a bit of a basket case (very low margins, a focus on sales growth without regard to profit). In recent years, there seems to have been a change and profits have grown rapidly, but it is still the lowest quality company of the three listed call centers. In the 1Q of this FY, transcosmos posted a 72% decline in OP as their Covid-19 related business ended. 

Prestige is particularly attractive for high stability, best-in-class margins and sales growth, and a valuation at half the level of BellSystem 24. 

Business Description

Prestige operates 9 call center “campuses” that are mainly in the rural Tokohoku (northern part) of Japan. They have 2 more campuses under construction set to open in 2024 and 2026 respectively. They historically open one campus every 2 years. 

There are benefits and drawbacks to locating call centers in such areas. The benefits include lower wages than Tokyo or other cities and, according to the company, the cold temperatures of the north gives the people fortitude, which is required when you have occasional irate customers to deal with. 

The primary drawback is the low and falling populations of these areas. If you have 30% turnover, like a normal call center, you need to completely refresh your staff every three years. You would soon run out of new people in the North. Prestige has solved this problem by making “campuses” complete with sports facilities, daycare, dining halls, etc. to provide people with a pleasant work environment. As a result, turnover at Prestige is around 10%, or a 10-year average work span for their people. 

This is also Prestige's secret to profitability.  Their workers stay longer, so they can actually invest in training them. With added training, the workers can take on more challenging and higher-priced work such as auto accident handling and health care support for travelers. These are not the kinds of things you would want a rookie to do. 

No one has tried to copy the Prestige rural campus model because it is antithetical to the traditional call center culture that works people as hard as possible until they quit. The capex mentalities are also totally different. A traditional call center requires a rented room, some phones and computers. It can be built in a matter of weeks for a few million yen. Meanwhile, Prestige is investing about 2.5b every two years to build a new campus with 500-800 seats. Most call center operators hate the idea of such heavy investment in assets. 

Segments

Prestige’s business consists of 7 segments.  

Automobile 43% of Sales / 45% of Operating Profit

Providing customer support for insurance companies, but also for automakers like BMW (20+ years as the exclusive customer support operator). They are increasingly expanding into on-the-ground support, creating a fleet of tow trucks and additionally investing in emergency charging vehicles for EVs that run out of power. This is their way of differentiating from other pure call center operations. Their auto insurance customers are primarily Internet-based insurers who compete on cost and are growing market share. 

Property 14% / 10%

There are two main businesses in Property - handyman dispatch service that is provided by companies like Tokyo Gas for when a key is lost or a toilet breaks. This is a stock business. 

The company also operates call center and maintenance operations for coin parking lot owners. Mitsui Repark is the main client. This business should be a steady maintenance business with good margins, but they are expanding into the Chugoku and Kyushu regions, which requires forward investment in offices, hiring, and cars for maintenance workers before they can operate profitably. Profitability is likely to improve going forward. 

Finance 15% / 26%

This business is run by listed subsidiary Entrust (7191) – providing rent guarantee service to Daiwa House mainly (a kind of insurance). Prestige owns 57%, so unfortunately a large portion of earnings for this rapidly growing segment are lost to minority interest. Entrust has been shifting their business model to take on more direct risk of guaranteeing rent for Daiwa, and thus OP is growing at a 20% rate for a few years.  They are also expanding into collections for hospitals, a kind of blue ocean field. 

Global 14% / 9%

Providing support for Japanese stationed or traveling abroad, particularly for health insurance / medical support. This business went to basically zero during Corona, but is rebounding steadily. Global’s recovery should continue as Japanese traveling abroad is still quite low compared with pre-Covid 19 levels. They also provide credit cards for Japanese nationals overseas, which can be a particular problem for someone on a short term stint at a foreign office. 

Customer 12% / 12%

About half of this business was providing Covid vaccine appointment call center support. That business has ended. The segment is somewhat catch-all and includes support for product warranties, local government helplines, credit card support centers. 

IT 1% / 2% & Social 1% / Negative OP

These two segments are not material. 

Growth Prospects

The company appears to have more demand to take on new BPO jobs than they can handle. They will continue to build campuses to meet customer needs. There are a few reasons: switching to Prestige (or other call centers) is a way to lower costs for a company and allow the customer to focus on core competencies.  In addition, it is getting harder to staff in-house customer support functions, at least in a cost-effective way.  

Prestige says when they plan a call center, customers generally try to lock in a portion of the seats (e.g. 100 seats, 200 seats) for their expected outsourcing needs. 

Once a client outsources a call support function, they are probably not going to in-house it again. It is too much work to rebuild that functionality. So as long as Prestige keeps customers satisfied, it becomes a kind of stock business.

The company currently has 5,000 seats with 79.5% occupancy, or around 4000 in use. They are adding an additional 1300 seats over the next 3 years. The newest campuses tend to have low utilization. So there is potential for 50% growth over 5 - 7 years from a supply perspective (nearing 100% occupancy of 6300 seats).  From a demand perspective, there does not appear to be any major hurdle to reaching those levels. 

Estimates / Valuation

I estimate the company will reach 8.2b in OP this year, and grow at about a 10% rate for the next 2 years, reaching 10b in F3/26.  10b is a kind of psychologically important level for large funds to look at a company, so I see the potential for the valuation level to rise as it approaches that level.  

At a 10x EV/EBIT on 10b in OP, I think the company market cap is likely to reach 128b, or 1,005 yen per share (+58%) over the next 2 years. That would only put it back to its 2019 peak level when it was earning 5b in operating income. Even at that price, the company and shares are likely to continue to compound at a reasonable rate. 

Management

The founder and Chairman, Mr. Shinichi Tamagami, is a remarkable success story. After graduating from high school he skipped college and started working at Toyota. He couldn’t conform to their culture and so quit almost immediately. He moved to Los Angeles for an adventure. After working some menial jobs, he stumbled into the travel industry.  He ended up meeting the founder of Pasona, who persuaded him to start a business in the US with Pasona’s backing. Tamagami came up with the idea of reservation services for Japanese tourists, which became the seed of Prestige. They then expanded into credit cards for Japanese stationed overseas. Pasona listed the company in 2000, right before the September 11 attacks devastated the travel industry. Prestige  nearly went out of business, but managed to survive. Now Tamagami owns about 30% of the company and has been steadily growing it ever since. 

Risks

Disruption from artificial intelligence

Passing on inflation in personnel costs to clients

Maintaining an adequate labor force in declining population areas 

Catalyst

Unfortunately, I do not envision any specific catalysts that will cause a rerating of the shares other than the steady march higher of sales and profit.

A buyback is possible, but the probability is not high. They last conducted a buyback in 2022 when the shares were ~20% above the current level, so from an economic perspective it certainly makes sense.