Asset Value Investors, the managers of AVI Japan Opportunities (AJOT) has announced that it has submitted what it describes as “modest proposals to SK Kaken as a test of company’s motivation to improve performance and share price”. AVI says that its proposals aim to address, at no cost to SK Kaken, some of the factors contributing to the company’s poor share price performance and low valuation. AVI highlights that SK Kaken’s share price has severely underperformed relative to the TOPIX and industry peer group, and says that its rejection of AVI’s modest proposals to address technical causes of low share price reflects controlling family’s misaligned motivations.
Background to the proposals
AVI says that, over the last 12 months, SK Kaken’s share price has underperformed against the TOPIX Index and its peer group of paint and coatings companies by -31% and -33%, respectively. SK Kaken now trades on an EV/EBIT ratio of less than 1x, a price-to-book ratio of 0.9x with net cash covering 93% of its market cap.
In AVI’s view, there are multiple causes for SK Kaken’s underperformance and undervaluation. Chief among these are poor operating results reflected in low profit growth, inefficient capital allocation, lack of board diversity and independence, woeful shareholder communication, excess treasury shares and a prohibitively high minimum trading lot size. In comparison to more aggressive and dynamic competitors in the industry, SK Kaken is falling behind, in their view.
AVI says that these issues reflect a lack of urgency and weak management discipline, a symptom of a company with a controlling shareholder. Approximately 40% of SK Kaken’s shares are owned by, and key senior executive positions are held by, members of the founding Fujii family. Against this background, AVI has submitted shareholder proposals to call to the attention of fellow shareholders the company’s stubborn resistance to even the most reasonable proposals.
The proposals
The first proposal is a 10-for-1 stock split to reduce the prohibitively high minimum trading lot from approximately ¥4,000,000 (the sixth highest trading value among TSE-listed companies) to ¥400,000. AVI says that this will create greater liquidity and open the company to investment by retail investors, who are now effectively excluded.
The second proposal is to cancel 90% of its treasury shares. SK Kaken holds 14% of outstanding shares in treasury. These shares have no business purpose such as M&A or executive incentive stock plan – SK Kaken has no M&A plans or a stock-based compensation scheme – and serve only to depress the share price, in AVI’s view.
AVI says that it is not the only shareholder disappointed with the Company’s treatment of minority shareholders, with only 76% of shareholders supporting the re-election of SK Kaken’s Chairman in 2020, compared to 93% in 2016.