Morningstar Equity Research Report 2021.4.16

A packaged service provider supporting business management, DX initiatives, etc.

Recommendation rating（Apr 15）

Scala, Inc.

Overweight（4845.TSE 1st）
Stock Price

Unit of Investment

782yen（4/15）

100Shares

Market Cap

52-Week High13.74Bil yen

52-Week Low

857yen（4/15）

PER（E）

701yen（21/1/26）

5.1（21/2/19）（4/15）

Eyeing a sales expansion stage, Scala focuses on the formulation of‘schemes’ for its Management and DX Support businesses■Upfront investment weighed down profits for
1H of FY21

￥1,500 ～￥2,000

Estimated Share Price Range

Scala, Inc. reported its consolidated business results (non-GAAP base)for the first six months (cumulative 2Q or 1H) of the fiscal year 2021,
ending June 2021 (FY2021). In the period, sales revenue stood at Yen
4,285 million (up 17.5% year-on-year) and operating income was Yen 68
million (down 76.5% y-o-y). Although its mainstay IT/AI/IoT/DX businesssuffered a temporary surge in cancellations from the loyal client baseamidst the COVID-19 pandemic (‘the pandemic’), this was well offset by
fresh contributions from the newly established ‘HR and Education’ businessand solid performance at the EC business, an operator of buying, selling andreusing matching game cards, as its digital marketing campaign led to anincreased inflow of new users. On the profit front, the IT/AI/IoT/DX businessdelivered a double-digit decline in profit, but this was due to its proactive
investment, mostly in newly launched businesses. Two business segments- HR & Education and Investment & Incubation recorded a net loss. To
cope with the pandemic, the former segment saw lower unit prices after
the transition from face-to-face to the online platform of part of its new
graduate recruiting programs, while the latter faced mostly up-front costs
for development and employment programs.

Yen

2,000
1,670
1,340

1,135

13 WeeksMoving Average

1,010
680
350

thousand
Shares

26 Weeks Moving Average395

16,000Volume8,000

13Weeks Moving Average

0
4

5

6

7

8

13 WeeksMoving Average

9

10 11

12

26 WeeksMoving Average

￥770

1

2

3

4

Volume（13 Weeks Average）￥822

1,080,162Shares■Proceeds from sale of SB shares are to finance theInvestment & Incubation businessand the loyal clientele-based income derived from this business. On
the other hand, Scala provided no capital, only a ‘scheme’ to Shinoken
Group Co., Ltd. (security code 8909) who engages in the sale of private
condominiums and apartments for investment purposes. Scala is tohelp Shinoken formulate a value creation story (= IR support) while
the two companies jointly develop the ‘property trust DX platform’ (=DX support). This platform will serve to convert conventional face-toface property transactions, entailing documentation and signatures, tonon-face-to-face, online-based transactions using digital IDs. Shinoken
Group will be the first user of the platform, subsequently marketingthe completed version to other companies.

In August 2019, Scala formulated its ‘Medium-term Management Plan
COMMIT5000’ (details in ‘Business Environment and Outlook’ noted
later). In this context, FY2021 that ends June 2021 may be regarded as
the period to recompose management resources and lay the groundworkfor the Med-term Plan’s success. In the wake of share sales, the company
has ample cash to finance its Investment & Incubation business. However,rather than prioritizing capital injections in operations, it set out to develop
schemes of business (hereinafter ‘scheme(s)’) that are expected to generate yearly revenue of Yen 100 ~ 200 million for offer to public companies.
For example, on behalf of Architects Studio Japan Inc. (‘ASJ’, security code6085), an intermediary between registered architects and construction
company members, Scala formulated a ‘scheme’ comprising ‘value-based
management (IR) support’, ‘DX (digital transformation) support’ and ‘AI
Engagement Fund (an investment limited partnership designated as Scala
Co-creating Shared Value No.1, hereinafter ‘SCSV’). Scala provides ASJ with
IR support to help the latter create new value, with the aim of posting gains
from the sale of ASJ shares on a long-term basis. As for the DX support
business, Scala collaborates with ASJ to develop the ‘construction work
DX platform’. Scala is to receive fees for a platform development service

Scala’s share price floundered in response to the announcement of
its business results for the cumulative 2Q of FY2021, but lately it has
shown a sign of recovery. The company’s approach to prospective
businesses with various ‘scheme’ proposals is expected to progress
further from this quarter into the next fiscal year ending June 2022.
However, for some months ahead, we are expecting that the IT/AI/IoT/
DX business will secure a solid revenue base which is large enough toabsorb the cash to aggressively finance the Investment & Incubation
business. Morningstar believes that Scala sold off shares in SB, whichshowed steady but mediocre growth, to shift its strategy of injecting
cash in highly profitable projects; however, the market appears
not to have factored this strategic change in the recent share price.
Considering this, we have revised our previous estimated share pricerange (¥1,000 ~ ¥1,500). We have set the new high end price limitat ¥2,000. This was calculated by applying 13 times of forecast PER,
undervaluing the average industry forecast, multiplied by the low endof its ESP guidance range at ¥154. The new estimated low-end pricehas been set at the nearest downside support at ¥1,500. Our valuationof the company shares remains unchanged with an ‘Overweight’ rating.

Separately, by the end of 1Q, Scala transferred its entire shareholdings
in Softbrain Co., Ltd., (‘SB’). Consequently, from 2Q, businesses including
SFA and Field Marketing that had been operated by SB have been reported
as discontinued operations and excluded from the business segment. In
conjunction with the change, there was a recomposition of its segment
mix. (see Appendix)

Financial Results （as of Apr 15, 2021）
Revenue（Yen Mil）
2019-62020-62021-62022-6

Past Results
Past Results
Company est.
MS est.
MS est.

Operating Profit

17,112

33.4

2,153

39.2

2,137

39.1

17,025

▲0.5

1,045

▲51.5

1,018

▲52.3

9,000
～12,000

ー

100
～500

ー

100
~500

ー

2,700
~3,10010,500

▲38.3

300

▲71.3

300

▲70.5

17,050

1.6

1,705

5.7

1,705

5.7

（Yen Mil）

YoY（％）

Income Before
Income Taxes（Yen Mil）

YoY
（％）

YoY
（％）

Net Profit（Yen Mil）

YoY
（％）

EPS
（Yen）

946

33.8

55.9

431

▲54.4

24.8

ー

154.19~177.04

2,900

6.7

165.1

720

▲75.2

41.0

※ Scala, Inc. has prepared its financial statements under IFRS (International Financial Reporting Standards) from the fiscal year ended June 2016,
but figures in the table (adjusted items that arose after the adoption of IFRS were excluded) are restated in line with non-GAAP.
This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

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Morningstar Equity Research Report 2021.4.16

Scala, Inc.（4845・TSE 1st）
In addition, the share price is highly likely to make major leaps forward
when Scala newly launces No.2 and No.3 SCSVs and the achievement of its
Med-term Management Plan comes into sight on the back of a growth in‘scheme’ proposal adoptions.

Scala Inc.’s revenue mix by segment（Takahiro Arimura）■Company Overview
Scala, Inc. embarked on an enterprise with the SaaS/ASP business.
In July 2016, the company incorporated a marketing support systemprovider Softbrain Co., Ltd., as its consolidated subsidiary. In Marchand November 2018, Scala incorporated both Leoconnect, Inc., thena subsidiary of Hikari Tsushin, Inc. (security code 9435), and Connect
Agency Inc., a sub-subsidiary of Hikari Tsushin, as its consolidated
subsidiaries. In August 2019, in line with its mid-term plan, Scalaannounced that it had consolidated J-Phoenix Research Inc. which
engaged primarily in support and consultation for the implementation of
AI/IoT technology. At the same time, it established Scala Partners, Inc.,an enterprise that provides financial assistance and develops companies
within the AI and other fields. In April 2020, the company incorporated
Grid Group Holdings Co., Ltd., a facilitator of regional revitalization
and regeneration programs among other services, as its wholly owned
subsidiary. Then following a successful takeover bid by C5-8 Holdings
Co., Ltd. for Softbrain Co., Ltd. in November 2020, Softbrain Co., Ltd. andits subsidiaries became discontinued operations from 2Q FY2021. In
November 2020, Scala launched a ‘Reversed Publicly Solicited Proposal’service (or ‘Reversed Proposals’ for short). The company developed theservice in collaboration with Public dots & Company, an operator of
public-private co-creation projects. The Reversed Proposal focuses on
SDG initiatives. The service has garnered attention for its innovative
method - it looks to local municipalities to plan for public-private cocreation projects, while private sector organizations that plan the actual
development the new projects budget and finance them.
■ Business Environment and Outlook
According to the ‘2020 WHITE PAPER: Information and Communications’released by the Japanese Ministry of Internal Affairs and Communications, thepenetration of AI and IoT has shown marked progress, with the number of IoT
devices in use worldwide estimated to increase from roughly 25.4 billion units
in 2019 to 34.8 billion units by the end of 2022. On the back of mounting
needs for further efficiency and labor saving across the board, the speed ofadoption of AI technology appears to accelerate going forward.
Meanwhile, Scala, Inc. has formulated its ‘Medium-term Management
Plan COMMIT5000’. The plan outlines the company’s three ‘capabilities’
that have been acquired through the operation of SaaS/ASP services (1.
The capability of discovering real issues; 2. The capability of revealing thehidden value of resources; and 3. The capability of proposing and executing
an optimal combination of issues and resources to maximize value.) With aneye to effectively implementing the three capabilities, the company has newly
established the following segments that will a assume the objective: 1. An added
value-based management support business; 2. An IT/AI/IoT-related business;
3. A social issue solution-oriented business. In line with the Medium-termManagement Plan, Scala is set to rearrange the existing and new businesses
into the three Business domains, with a view to generating an organic alliance
between them and three capabilities to maximize customer value. With thefulfillment of this vision, the plan has set dual-period earnings projections. One
is to achieve Yen 100 billion in sales revenue (operating income of Yen 10
billion) by FY2025 and the other Yen 500 billion in sales revenue (operating
income of Yen 50 billion) by FY2030. To date, the company has developed
and commercialized projects or programs building on its three capabilities,
aimed mainly at listed companies in Japan. However, it now plans to expand
its markets to target government-affiliated enterprises, local authorities andoverseas companies.

(Source) Created by Morningstar Japan, based on the company’s data.

Business segment overview
When Softbrain Group companies discontinued, Scala recomposed its businesses into five segments.

IT/AI/IoT/DX

Customer
SupportHR & Education

EC

Investment &Incubation

Description of businessGroup company

Reportable segment

Scala Communications, Inc.
Scala Service, Inc.

Provision of SaaS/ASP services

Scala Next Inc.

Development of SaaS/ASP services andoffshore development

Connect Agency, Inc.

- based PBX service
Cloud

Retool, Inc.

Planning, development and sale of cloud activity
management tools

Social Studio Inc.

Support administrative bodies and local municipalities
in their promotion of DX programs

Leoconnect, Inc.

Consulting of customer support (call center operation, etc.)

Grit Group Holdings, Inc.
Athlete Planning, Inc.
Sports Stories, Inc.
FourHands, Inc.

Scala PLAYce, Inc.

Recruiting agency, child education, physical education,
support for recruiting overseas human resources

Operation of EC sites to trade matching game cards

Scala, Inc.

Group headquarters, holding company and investment business

Scala Partners, Inc.

Innovation, incubationand investment-

J-Phoenix Research Inc. (JPR)

Support for value based management(preparation of analyst and integration reports;
fund management support)

SCL Capital LLC

Investment fund management

SCSV-1 Investment Limited Liability
Partnership

Investment fund(Source) Created by Morningstar Japan, based on the company’s data.

Risk Factors
Scala commits to a service level agreement (SLA) with clientsof SaaS/AS services. SLA defines a certain level of assurances forserver operations, care for service failures, notice concerningscheduled maintenance, among others. This indicates that thecompany may face a large amount of indemnity should its
service fails, for whatever reason, to comply with the levels of
assurance defined by SLA. Separately, in November 2018 thecompany established Scala Next, Inc., with the aim of planningand developing SaaS/ASP businesses and services. The subsidiary
develops part of the cost-reduction projects in its Mandalay
branch in Myanmar. In February 2021, the Myanmar nationalarmy launched a coup d'état, then in March, six districts inYangon (the country’s largest city) were placed under martial law.
Although the Mandalay branch of Scala Next, Inc. has incurred
no actual damage, it is necessary to keep a close watch on theheightening geopolitical risk in the country.

Shareholder Return（As of Apr 15）■ Dividends■ Shareholder Special Benefits

Dividend Per ShareFirst half

Second half

Annual2019-6

Past Results

¥12

¥12

¥24

2020-6

Past Results

¥14

¥14

¥28

2021-6Company est.

¥16

¥16

¥32

None

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

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Morningstar Equity Research Report 2021.4.16

Scala, Inc.（4845・TSE 1st）Competitor Comparison（If the number is better than rivals, it's highlighted by red character）（As of Apr 15）
Scala, Inc.
(4845・TSE 1st)
Stock Price
Basic Point

GrowthProfitability

Financial
HealthCybozu, Inc.

(4776・TSE 1st)￥782

￥1,680￥2,512

Unit of Investment

100Shares

100Shares

100Shares

Minimum Investment Amount￥78,200￥168,000￥251,200

June

February

December

5.1
1.8
4.1%

15.6

1059.9

Revenue Growth Rate（E）▲47.1%

7.3%

Operating Profit Growth Rate（E）▲90.4%EPS Growth Rate（E）

743.5%▲1.9%▲54.4%▲30.5%▲92.4%

Operating Margin（E）

1.1%

5.6%

ROE

4.5%

20.0%
29.3%

27.6%

4.2%

19.1%

21.5%

29.7%

55.6%

52.4%

Fiscal Year End
Share Price
Indicator

PiPEDO HD, Inc.
(3919・TSE 1st)

PER（E）PBR
Dividend Yield（E）

ROA（Ordinary income/Total
assets）
Equity ratio
Debt-Equity Ratio
Current Ratio

2.9

18.0

―

0.5%

155.8%

39.1%

145.5%

221.3%

17.0%

0.0%
119.8%We selected PiPEDO HD, Inc. (security code: 3919) and Cybozu, Inc. (security code: 4776) as industry peers. Scala competes with these on some operations of the Site Assistantand CRM Services in the SaaS/ASP business field.
※ Scala’s estimated data shown above represent the low end of its guidance ranges for FY2021.

■Growth Potential■Profitability■ Financial Stability

The consolidated earnings for the full
FY2021, ending June 2021, are expected toshow declines in both revenue and profit inreal terms. This is due to the discontinuationof the SB business from 2Q (between October
2021 ~ June 2021). On the other hand, theyear has recognized a gain from the saleof SB shares and the gain is expected tofinance the development of the Investment& Incubation business. From a medium- andlong-term strategic perspective, these moves
can be regarded as a recomposition of Scala’s management resources, not impediments
to its growth potential. By holding SB shares,
in time, the shareholder value may double,
but based on management’s judgement
and estimation, Scala resolved to invest theproceeds from the sale of SB shares in highly
profitable projects, resulting in an increase inshareholder value at least four times that of
the former case.

Scala forecasts that its operating income
margin for FY2021 will be in the rangeof 1.1% ~ 4.2%. Its profitability is likely
to be under downward pressure fromup-front investment in its operations,with particular focus on IT/AI/IoT/DX
and Investment & Incubation businesses
as well as new businesses and business
scheme development projects. Meanwhile,
its proactive investment in growth anddevelopment programs implemented
in FY2020 lowered levels of operating
income as well as the other income items
presented under it, thereby its ROE and
ROA are relatively lower than those of its
peers.

At the end of FY2020, Scala’s equity
ratio was relatively lower than those of
its peers. Its debt equity ratio was greaterthan 100%, meaning its debt, including
borrowings, was in excess of its equity
capital. Nevertheless, the company
management regards M&A (corporate
mergers and acquisitions) as an importantbusiness issue therefore, the effective useof interest-bearing debt can be viewed
as its strategic intent. On the other hand,the company owns a large proportion ofcurrent assets, with its liquidity ratio in
the mid-position in the competition table.
We believe that Scala’s balance sheet iswell controlled overall, with no particularconcern about its financial standing.

Of industry peers, we note the revenue
growth and negative operating income
growth outlooks by Cybozu, Inc. The company
expects solid growth in revenue from thecloud business for FY2021, ending December
2021, and plans to implement an aggressive
investment strategy to boost profitability.
Each of the above earnings figures forcomparison represents the low end of its
company guideline range.

Morningstar Japan K.K.
Research & Analysis Department
Analyst Takahiro Arimura+81-3-6229-0078
tarimura@morningstar.co.jp

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

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Analysis Points■ Analyst Comment■ Company Overview

most recent earnings trend and businesscompany is engaged in and how revenue

environment. It shows the most importantsources are defined. Also on the basis of

information for stock investment suchour research, it discusses what businesses

as evidence for investment decisions,the company will focus on in years toperspectives on earnings forecasts andcome and how it carries out mid-termbusiness prospects. Also to make sure it

business plan.

Each analyst reports and evaluates theis easy to comprehend, we write in 2-4
paragraphs and use bold to emphasize
important texts.

■ Revenue and Earnings Trend

It explains in detail what businesses the■ Risk factors
It shows the company’s risk factors anddescribes various aspects of risks such as
business, earnings and financials. Typicalstock market risks are also taken into
consideration.

■ Business Environment and Outlook

It discusses current circumstances andgrowth potential of the industry to which
the company belongs. A comprehensive

It reports earnings in past two fiscal years,

report on the industry from different

company forecasts and our forecasts forperspectives is provided through research

the current and next fiscal year. We predict

interviews to competitors. Specific figures

earnings based on research as well as pastof the industry data are also introduced.

quarterly earnings trend and analysis bysegments.

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.