Asset Value Investors (AVI), manager of AVI Japan Opportunities, has submitted shareholder proposals to SK Kaken addressing six issues which it feels contribute to that company’s poor share price performance, low valuation, and potential delisting from the Tokyo Stock Exchange (TSE).
AVI says that, despite a high-quality business model and a dominant share of the domestic construction paint market, SK Kaken trades on an EV/EBIT ratio of less than 0x with net cash covering 103% of its market cap (all as of 30 April 2022). Furthermore, over the last five years, SK Kaken’s share price underperformed the TOPIX Index by 69% and its peers by 32%, while profits dropped by 9%. With 409 shareholders, SK Kaken only just meets the requirements for listing on the TSE Standard market.
Joe Bauernfreund, CEO of AVI, comments: “SK Kaken’s issues reflect a lack of urgency and weak management discipline, a symptom often encountered at 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 family. The average tenure of the SK Kaken board is 21 years and the founder has a major influence on the decision-making process. This leads to a culture of intransigence and traditionalism, starving the company of progress including on environmental concerns that impacts wider stakeholders.
We submitted shareholder proposals last year, seeking a 10-for-1 stock split and to cancel 90% of the outstanding treasury shares. Although general shareholders strongly endorsed both our proposals (55% and 57% respectively), it has fallen on deaf ears.”
Following last year’s proposals, in December 2021, SK Kaken announced a shareholder benefit programme, but one that AVI feels was a “nonsensical attempt to attract more shareholders and retain its TSE listing“. It notes that, for the privilege of holding more than 100 shares, worth Y3,550,000 as of 30 April 2022, shareholders qualify for a voucher card worth Y5,000 – an effective 0.14% return on investment.
Shares held for five years
AVI’s funds have been a large minority shareholder and owner of SK Kaken for five years. Due to a lack of progress and both the president and the chairman refusing to meet, AVI has submitted shareholder proposals to address six issues aimed at sustainably enhancing SK Kaken’s corporate value and retaining the company’s TSE listing.
- A 10-for-1 stock split to reduce the prohibitively high minimum trading lot from ¥3,550,000 (£22,326, the eightieth-highest trading value among TSE-listed companies). AVI believes that this should improve liquidity and attract individual shareholders. [The minimum dealing amount is still a big number – 1000-for-1 might also be suitable.]
- The cancellation of 90% of the 438,400 shares held in treasury. SK Kaken currently holds 14% of outstanding shares in treasury and has not put forward any plans to use the shares such as M&A or executive compensation.
- Increase the dividend from Y400 per share to Y800, for a 30% payout ratio. SK Kaken has hoarded earnings on its balance sheet, with cash and cash equivalents accounting for almost 70% of balance sheet assets.
- Shorten the board of directors’ term to one year. Against a background of increased awareness of the need to strengthen corporate governance in Japan, there has been a trend of reducing director terms from two to one year.
- Appoint a minimum of two independent directors. SK Kaken’s board of directors only consists of one external director, despite the Corporate Governance Code stipulating that for a company with a controlling shareholder, in SK Kaken’s case the family, AVI says that at least one-third of directors should be independent.
- Disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Although the Corporate Governance Code stipulates that companies should promote positive and proactive responses to sustainability issues, SK Kaken lacks a sustainability policy.
AVI is calling on fellow general shareholders to continue to express their disapproval of management policies under the influence of a controlling shareholder who has neglected the interests of minority shareholders for too long by voting in favour of the shareholder proposals.
A presentation outlining AVI’s arguments and the full shareholder proposals are available at AVI’s dedicated website www.paintingabetterSKKaken.com.
AJOT : AVI targets SK Kaken