Golf Digest Online : Sessa Partners 4Q Follow-up(3 MB)

Golf Digest Online | 3319

Sponsored Research February 28, 2023

Sessa Investment Research

Rare opportunity presents itself a second time

This time investors have the benefit of a proven track record

SUMMARY

• Based on the Company's 4Q results briefing and our follow-up interview, the outlook for FY23/12 is for growth to be back-half loaded, not expecting anything noteworthy during the 1H. This term SkyTrak will make a full-term contribution following 4 months in FY22/12. CEO Ishizaka said the Company is aiming for a 1H announcement of the launch of its next generation premium version named SkyTrak+, with advanced tracking features, ability to be used outdoors in bright sunlight, etc. GOLFTEC will continue to target opening 20 new lesson centers.
• In Japan, there is good visibility on new installations of TOP TRACER RANGE facilities. In golf goods sales, while there is some concern about the impact of inflation and rising prices cooling demand, GDO will continue new initiatives like subscription service TRY SHOT enabling customers to try out using expensive clubs before purchase, and in golf course reservations, GDO will continue efforts in HOT PRICE special play tickets to boost demand.
• GDO net sales have only declined twice in the past, in 2011 in the wake of the Great East Japan Earthquake and Tsunami, and in 2020 on the initial breakout of COVID- 19. In the case of acquiring a majority stake in US GOLFTEC in Jul-2018 (8% → 60%), there were many uncertainties about the length of time required to turn the business profitable. However, in FY19/12, the first full year after acquiring a majority stake, EBITDA for the Overseas segment turned positive.
• The graph below shows the striking resemblance of the current selloff to that after the acquisition of a majority stake in US GOLFTEC in 2018. The current PSR of 0.32 is at the same level as the capitulation at the beginning of 2019. This time, investors have the benefit of a proven track record of execution by management.

Trend of GDO's price-to-sales ratio (PSR) surrounding major US acquisitions

1.00
0.90
0.80
0.70
0.60
0.50	Anticipatory rise			COVID-19
0.40	Discount ST earnings pressure
Oversold rebound
0.30
Capitulation phase	0.32				0.32
0.20
Jan-16	Jan-17	Jan-18	Jan-19	Jan-20	Jan-21	Jan-22	Jan-23
Source: compiled by SIR.

4Q Follow-up

Focus Points:

'Only one' golf specialist online gear retail, course reservations and media platform operator entering a new growth phase on acquiring the world's largest golf lessons operator in the US.

Key Indicators

	Share price (2/24)	919
	YH (22/8/25)	2,250
	YL (22/3/9)	882
	10YH (22/8/25)	2,250
	10YL (14/2/4)	168.0
	Shrs out. (mn shrs)	18.274
	Mkt cap (¥ bn)	16.794
	Shr equity ratio (9/30)	3.68%
	23.12	P/E (CE)	30.5x
	23.12	EV/EBITDA (CE)	7.5x
	22.12	P/B (act)	10.63x
	21.12	ROE (act)	7.6%
	23.12	DY (CE)	1.03%

6M stock price (weekly)

2,200

2,000

1,800

1,600

1,400

1,200

1,000

800

Chris Schreiber CFA

Company Specialist [e-mail]

This report was prepared by Sessa Partners on behalf of Golf Digest Online Inc. Please refer to the legal disclaimer at the end for details.

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Golf Digest Online | 3319

Sessa Investment Research

The cover page of TANSHIN financial statements lists figures for basic EPS and BPS. BPS for FY22/12 is shown as a negative (245.82) yen. As explained in Note 1, this calculation strips out the ¥6.0bn in shareholders' equity from the issue of preferred shares. This is merely an accounting convention, and it does not mean the Company has negative equity.

Basic EPS of 16.44 yen came in substantially below revised 9/22 guidance for

68.28 yen, but this was mainly due to recording non-operating expenses for foreign exchange losses described above.

Likely reasons for the knee-jerk selloff, and why this is a rare opportunity

SUMMARY

• The first catalyst may be the substantial shortfall to revised full-term guidance announced on September 22, although this was already flagged in an official downward revision announced on January 31, mainly due to recording a foreign exchange loss of ¥560mn on the forward exchange contract in October to fix yen payment for the additional 38% equity interest in US GOLFTEC, with the yen subsequently strengthening in November, and recording a foreign exchange loss of ¥250mn on year-end valuation of a USD loan to US subsidiary GDO Sports pursuant to acquisition of SkyTrak business.
• Undoubtedly the biggest immediate concern is deterioration of the financial condition. As a result of the acquisition of SkyTrak business and the additional stake

Calculation method for per share information

JPY thousand, JPY,	For the fiscal year ended	For the fiscal year ended
number of shares	December 31, 2021	December 31, 2022
Per share information
Net assets per share (yen)	405.17	(245.32)
Basic earnings per share (yen)	56.68	16.44
Diluted earnings per share (yen)	－	16.43
Basis for the calculation of net assets per share
Total net assets	7,411,371	1,598,875
Amount deducted from total net assets	7,536	6,064,540
(Stock acquisition rights)	7,536	25,006
(Amount to be paid in for preferred shares)	－	6,000,000
(Preferred dividend)	－	39,534
Net assets related to common stock at the end of the period	7,403,835	(4,465,665)
Number of shares of common shares used in the calculation of	18,273,610	18,203,607
net assets per share at the end of the fiscal year
Basis for the calculation of net income per share
Basic earnings per share
Profit attributable to owners of parent	1,035,822	339,325
Amount not attributable to common shareholders	－	39,534
Profit attributable to owners of the parent for common stock	1,035,822	299,791
Average number of shares during the period (Shares)	18,273,644	18,231,589
Diluted earnings per share
Adjustment of net profit attributable to owners of the parent	－	－
Increase in common shares	－	9,776
(Share acquisition rights)	－	9,776
Summary of potential shares not included in the calculation of	－	－
diluted earnings per share due to absence of dilutive effects

Source: compiled by SIR from TANSHIN financial statements.

(Notes) 1. The "Net assets per share" for the fiscal year ended December 31, 2022 is calculated by deducting from the total net assets the amount to be paid in for Class A preferred shares, which have different rights from those of common shares and the amount of preferred dividend.

1. The Company has introduced a stock compensation plan, " Board Benefit Trust (BBT)" from the current consolidated fiscal year, and the Company shares held by the trust account are included in the treasury stock deducted from the total number of shares issued and outstanding at the end of the period for the calculation of "net assets per share" (70,000 shares for the current consolidated fiscal year).
2. The Company's shares held by the Trust Account of the Stock Benefit Trust (BBT) are included in treasury stock as a deduction in the calculation of average number of shares during the period for the purpose of calculating "Basic earnings per share" and "diluted earnings per share" (42,018 shares for the current fiscal year).

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	Golf Digest Online | 3319			Sessa Investment Research
	GDO Consolidated Balance Sheets
	JPY thousand, % of total	as of 2021.12.31 as of 2022.12.31	4Q CHG AMT	Common	Common
	[J-GAAP]	end 4Q [A]	end 4Q [B]	[B - A]	Size [A]	Size [B]
	Assets
			Current assets
				Cash and deposits	2,904,770	2,421,492	(483,278)	13.29	5.57
				Accounts receivable - trade	2,689,067	3,063,950	374,883	12.31	7.05
				Merchandise	3,219,906	6,214,068	2,994,162	14.74	14.30
				Work in process	601	694	93	0.00	0.00
				Supplies	72,934	186,183	113,249	0.33	0.43
				Other	1,671,120	2,248,574	577,454	7.65	5.17
				Allowance for doubtful accounts	(15,871)	(16,022)	(151)	(0.07)	(0.04)
				Total current assets	10,542,529	14,118,942	3,576,413	48.25	32.49
			Non-current assets
				Property, plant and equipment
				Buildings and structures	4,378,001	6,711,466	2,333,465	20.04	15.44
				Machinery, equipment and vehicles	4,301	13,757	9,456	0.02	0.03
				Tools, furniture and fixtures	2,033,243	3,054,209	1,020,966	9.30	7.03
				Leased assets	13,506	13,506	0	0.06	0.03
				Right of use assets	－	7,631,816	7,631,816	－	17.56
				Construction in progress	161,585	217,280	55,695	0.74	0.50
				Accumulated depreciation	(2,775,756)	(3,970,111)	(1,194,355)	(12.70)	(9.14)
				Total property, plant and equipment	3,814,880	13,671,924	9,857,044	17.46	31.46
				Intangible assets
				Goodwill	4,059,538	8,479,098	4,419,560	18.58	19.51
				Contract based intangible assets	－	2,212,627	2,212,627	－	5.09
				Other	2,431,668	4,056,608	1,624,940	11.13	9.33
				Total intangible assets	6,491,206	14,748,333	8,257,127	29.71	33.94
				Investments and other assets
				Investment securities	10,467	10,519	52	0.05	0.02
				Deferred tax assets	252,395	210,436	(41,959)	1.16	0.48
				Other	746,957	706,290	(40,667)	3.42	1.63
				Allowance for doubtful accounts	(6,925)	(6,974)	(49)	(0.03)	(0.02)
				Total investments and other assets	1,002,895	920,271	(82,624)	4.59	2.12
				Total non-current assets	11,308,982	29,340,530	18,031,548	51.75	67.51
			Total assets	21,851,512	43,459,472	21,607,960	100.00	100.00

Note: common size analysis of a balance sheet displays items as a percentage of total assets, making it easier to spot changes in the capital structure.

(continued from P2)

in US subsidiary GOLFTEC (60% → 98%), total assets effectively doubled from ¥21.9bn to ¥43.5bn, while at the same time, net assets shrank from ¥7.4bn to ¥1.6bn (shareholders' equity ratio declined from 33.9% → 3.7%). Net interest- bearing debt swung from a net cash position of ¥0.9bn to net interest-bearing debt of ¥26.7bn. However, the compression of net assets was also previously flagged in the September 22 briefing (see graph on the top of P7).

• The Consolidated Statements of Changes in Net Assets provided on P5 show what happened to net assets under "Change in ownership interest of parent due to transactions with non-controlling interests." It can also be seen in the Consolidated Statements of Cash Flows under cash flows from financing activities as "purchase of shares of subsidiaries not resulting in change in scope of consolidation." In this case, GDO increased its stake in US GOLFTEC from 60% → 98%, without changing the scope of consolidation. According to CFO Nakamura, normally this would be handled by writing down minority interest, but since GOLFTEC had negative equity, ¥12.2bn was drawn down directly from capital

surplus and retained earnings. At the same time, the Company issued ¥6.0bn of

preferred shares.

(continued on P7)

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	Golf Digest Online | 3319			Sessa Investment Research
	GDO Consolidated Balance Sheets (continued)
	JPY thousand, % of total	as of 2021.12.31 as of 2022.12.31	4Q CHG AMT	Common	Common
	[J-GAAP]		end 4Q [A]	end 4Q [B]	[B - A]	Size [A]	Size [B]
	Liabilities
		Current liabilities
		Accounts payable - trade	2,244,851	2,893,669	648,818	10.27	6.66
		Short-term borrowings	2,025,715	5,603,721	3,578,006	9.27	12.89
		Current portion of long-term borrowings	－	1,514,167	1,514,167	－	3.48
		Lease liabilities	276	1,322,399	1,322,123	0.00	3.04
		Accounts payable - other	1,801,457	1,615,567	(185,890)	8.24	3.72
		Income taxes payable	258,382	61,396	(196,986)	1.18	0.14
		Deferred revenue	4,751,412	－	(4,751,412)	21.74	－
		Contract liabilities*	－	5,562,340	5,562,340	－	12.80
		Provision for bonuses	140,000	390	(139,610)	0.64	0.00
		Provision for point card certificates	322,183	38,642	(283,541)	1.47	0.09
		Provision for shareholder benefit program	29,782	27,787	(1,995)	0.14	0.06
		Provision for loss on litigation	69,012	－	(69,012)	0.32	－
		Other	1,978,350	1,220,960	(757,390)	9.05	2.81
		Total current liabilities	13,621,424	19,861,040	6,239,616	62.34	45.70
		Non-current liabilities
		Long-term borrowings	－	12,961,461	12,961,461	－	29.82
		Lease liabilities	1,022	7,729,247	7,728,225	0.00	17.78
		Provision for retirement benefits for directors (and other	109,002	121,002	12,000	0.50	0.28
		officers)
		Provision for share awards for directors (and other officers)	－	17,486	17,486	－	0.04
		Deferred tax liabilities	146,883	120,811	(26,072)	0.67	0.28
		Asset retirement obligations	286,779	344,812	58,033	1.31	0.79
		Other	275,028	704,735	429,707	1.26	1.62
		Total non-current liabilities	818,715	21,999,556	21,180,841	3.75	50.62
		Total liabilities	14,440,140	41,860,597	27,420,457	66.08	96.32
	Net assets
		Shareholders'	equity
		Share capital	1,458,953	1,458,953	0	6.68	3.36
		Capital surplus	2,447,104	－	(2,447,104)	11.20	－
		Retained earnings	3,466,545	(152,151)	(3,618,696)	15.86	(0.35)
		Treasury shares	(422)	(80,253)	(79,831)	(0.00)	(0.18)
		Total shareholders' equity	7,372,180	1,226,547	(6,145,633)	33.74	2.82
		Accumulated other comprehensive income				0.00	0.00
		Foreign currency translation adjustment	31,654	347,321	315,667	0.14	0.80
		Total accumulated other comprehensive income	31,654	347,321	315,667	0.14	0.80
		Share acquisition rights	7,536	25,006	17,470	0.03	0.06
		Total net assets	7,411,371	1,598,875	(5,812,496)	33.92	3.68
	Total liabilities and net assets	21,851,512	43,459,472	21,607,960	100.00	100.00

*Note: contract liabilities = provision for point card certificates and deferred revenue the previous fiscal year

Source: compiled by SIR from TANSHIN financial statements.

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Sessa Investment Research

Consolidated Statements of Changes in Net Assets (FY ended December 31, 2021)

JPY thousand		Shareholders' equity			Accum. other comp. income	Share
					Total	Foreign	Total accum.	Total net
		Capital	Retained	Treasury	currency	acquisition
	Share capital	shareholders'	other comp.	assets
	surplus	Earnings	shares	translation	rights
		equity	income
					adj.
Balance at beginning of	1,458,953	2,447,104	2,604,322	(296)	6,510,084	(153,558)	(153,558)		6,356,525
period
Cumulative effects of
changes in accounting					－				－
policies
Restated balance	1,458,953	2,447,104	2,604,322	(296)	6,510,084	(153,558)	(153,558)		6,356,525
Changes during period
• Issuance of new shares					－				－
• Dividends of surplus			(173,600)		(173,600)				(173,600)
• Profit attributable to			1,035,822		1,035,822				1,035,822
owners of parent
• Purchase of treasury				(126)	(126)				(126)
shares
• Transfer from share capital					－				－
to other capital surplus
• Change in ownership
interest of parent due to					－				－
transactions with non-
controlling interests
• Net changes in items other					－	185,213	185,213	7,536	192,749
than shareholders' equity
• Total changes during			862,222	(126)	862,096	185,213	185,213	7,536	1,054,846
period
Balance at end of period	1,458,953	2,447,104	3,466,545	(422)	7,372,180	31,654	31,654	7,536	7,411,371

Consolidated Statements of Changes in Net Assets (FY ended December 31, 2022)

JPY thousand		Shareholders' equity			Accum. other comp. income	Share
					Total	Foreign	Total accum.	Total net
		Capital	Retained	Treasury	currency	acquisition
	Share capital	shareholders'	other comp.	assets
	surplus	Earnings	shares	translation	rights
		equity	income
					adj.
Balance at beginning of	1,458,953	2,447,104	3,466,545	(422)	7,372,180	31,654	31,654	7,536	7,411,371
period
Cumulative effects of
changes in accounting			(1,790)		(1,790)				(1,790)
policies
Restated balance	1,458,953	2,447,104	3,464,755	(422)	7,370,390	31,654	31,654	7,536	7,409,581
Changes during period
• Issuance of new shares	3,000,000	3,000,000			6,000,000				6,000,000
• Dividends of surplus			(180,084)		(180,084)				(180,084)
• Profit attributable to			339,325		339,325				339,325
owners of parent
• Purchase of treasury				(79,831)	(79,831)				(79,831)
shares
• Transfer from share capital	(3,000,000)	3,000,000			－				－
to other capital surplus
• Change in ownership
interest of parent due to		(8,447,104)	(3,776,149)		(12,223,254)				(12,223,254)
transactions with non-
controlling interests
• Net changes in items other					－	315,667	315,667	17,469	333,136
than shareholders' equity
• Total changes during	－	(2,447,104)	(3,616,907)	(79,831)	(6,143,843)	315,667	315,667	17,469	(5,810,706)
period
Balance at end of period	1,458,953		(152,151)	(80,253)	1,226,547	347,321	347,321	25,006	1,598,875

Source: compiled by SIR from TANSHIN statements.

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