Description

Sun Corporation (6736.T) is one of the most compelling opportunities in the Japanese market. At the current price of ¥3,165 per share, Sun Corp is trading at approximately 40% of its net asset value. This is a sum-of-the-part (SoTP) story, with a highly desirable SaaS business and a well-aligned activist (Oasis) that will help crystallize its trapped value.

Sun Corp. has three core assets.

• A 47% stake in the US-listed SaaS company Cellebrite (CLBT). With 96m shares at a current price of $11.55, this stake is worth USD 1,104m.

• A net cash pile of USD 99m.

• An operating business that manufactures hardware for 1) data intelligence, 2) gaming (pachinko), and 3) Internet of Things (IoT) devices. The company forecasts USD 72m in revenue and breakeven EBIT for FY24 (ending March 2024).

I will ignore the operating business and value it at zero for simplicity. Adding together the stake in Cellebrite (USD 1,104m) and cash (USD 99m), the company's net asset value is USD ~1,200m or ~¥8,100 per share. This puts the current price at ~39% of NAV.

So, what is Cellebrite?

Cellebrite (US: CLBT) is the leading digital forensics and intelligence-gathering platform. The company provides software (SaaS) solutions for law enforcement agencies and governments to extract and manage digital evidence.

In 2023, the company generated USD 325m in revenue (+20% YoY), ARR of USD 316m (+27% YoY), and adjusted EBITDA of USD 62m (19% margin). The company has a market cap of USD 2,256m and net cash of USD ~300m. CLBT is guiding to USD 390m in ARR (+24% YoY), which puts the stock at ~5x ‘24 ARR, an undemanding valuation for a company that meets the “Rule of 40” (i.e. ARR growth + EBITDA margin > 40%).

The bull case centers on a few points:

• Existing customer expansion: Given that most crimes now include some digital component (~90%), government agencies and law enforcement continue to add licenses, given significant usage needs.

• Upselling new products to existing client base: In addition to traditional extraction products, CLBT is now layering on analytics and workflow management tools.

• Pricing: PE-owned competitors Magnet/Grayshift have raised prices by 30-40%, which leaves CLBT with untapped pricing power.

• Private market value: Thoma Bravo acquired competitors Magnet and Grayshift last year; Magnet Forensics was acquired for 10x forward sales.

CLBT still looks to be undervalued in its own right. This disconnect might exist for a few reasons: 1) it came to market via a spin-off from Sun Corp in SPAC form, 2) the company is Israeli, and 3) it is tightly held/controlled by Sun Corp.

In terms of valuation, if you hold the ARR multiple flat—since most “Rule of 40” SaaS names trade at HSD ARR multiples—and ARR keeps growing in the 20s range, it would be hard to see CLBT not compounding value at a similar rate over 1-2 years.

How do you get paid?

I know what you’re thinking: another SOTP in Japan—big whoop. How are you ever going to get paid on this?

The key here is that Oasis Management, one of the premier activist funds in Japan, has been involved since 2020 and remains well-aligned with a 15% stake in the company. Oasis won a key shareholder vote that led the company to spin off Cellebrite as a SPAC in 2021. The end move is to crystallize the value trapped in the Japanese parent.

In more recent months, Sun Corp has been increasingly under pressure from shareholders to take action to close the valuation gap. Less than a month ago, the management said that distributing CLBT shares as a dividend would be too difficult given its Japanese shareholder base. Still, they keep “considering various measures to enhance the SUN’s shareholder value.”

The press release was disappointing. An in-kind distribution of the shares would be the cleanest (and most tax-friendly) way to solve the valuation gap. However, I do not think the story ends here. While there are some complexities with distributing CLBT shares, some creative workaround might ultimately emerge. Alternatively, a sale of Cellebrite might not be out of the question either - Thoma Bravo took out both of its leading competitors - and at ~5x ARR, CLBT could be pretty interesting for either TB or another leading PE fund.

The “worst case” upside scenario is one in which Sun Corp simply sells its stake at the market price and gets taxed (~30%) on the proceeds. This scenario would yield a NAV per share of ~¥5,900, or about 85% upside from the current price. However, there are multiple reasons why the upside could prove to be higher:

1. There could be a more tax-friendly distribution of proceeds/shares.

2. The value of CLBT could keep compounding (especially if 1-2 years out).

3. CLBT could get acquired at a higher than ~5x ARR multiple.

4. The “remainco” has some value (1x revenue?).

5. Sun Corp could also pick up an additional 3m shares of Cellebrite if the stock hits $12.50 (worth ¥250 to NAV per share) and 3m if it hits $15 (worth ¥300 to NAV per share) as part of the original SPAC transaction.

Although it’s unclear what the value realization path will look like, I think the meaningful discount to NAV (at least 60%!), aligned activist (and improving corporate governance measures in Japan), combined with a desirable and growing asset, make this a compelling opportunity to be long. 

There are risks here: 1) there's no guarantee that the company will do anything with its CLBT stake to close the valuation gap, and 2) CLBT could be sold, and the company could hold on to the cash (although Oasis being in there gives me a bit more confidence that the company will act in shareholder's interests). 

Catalyst

- Announcement re: corporate action (distribution of shares, sale of CLBT, etc)