AVI Japan Opportunities has submitted shareholder proposals to both SK Kaken and NC Holdings.
AVI notes that, despite a high-quality business model and having a dominant share of the domestic construction paint market, SK Kaken trades on an EV/EBIT ratio of less than 0.8x and a price-to-book ratio of just 0.8x. Over the last five years, SK Kaken’s share price has fallen -19%, while its domestic peers’ share price has risen +13% and the TOPIX has gained +31%. With 410 shareholders, SK Kaken only narrowly 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. Over 40% of SK Kaken’s shares are owned by, and key senior executive positions held by, members of the founding Fujii family. The average tenure of the SK Kaken board is 15 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. We submitted shareholder proposals last year and the year before, and despite receiving strong support from non-Fujii family shareholders, SK Kaken has failed to reduce its excess treasury shares and raise its low dividend pay-out ratio.”
AVI has been a large minority shareholder and owner of SK Kaken for over five years. Due to a lack of progress and the Fujii family’s refusal to engage in strategic discussion, AVI is again seeking to enhance SK Kaken’s corporate value through submitting shareholder proposals. Although more radical reform is needed than can be addressed through shareholder proposals alone, it has identified two easily addressable issues, aimed at sustainably enhancing SK Kaken’s corporate value.
- 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 to complete M&A or improve executive compensation, for example.
- Increase the dividend from Y400 per share to Y800, representing a 30% payout ratio. SK Kaken has hoarded earnings on its balance sheet, with cash and equivalents accounting for 71% of balance sheet assets.
AVI is calling on its fellow shareholders to continue to express their disapproval of poor management policies, which are negatively influenced by a controlling shareholder who has repeatedly neglected minority shareholder interests.
AVI says that the conveyor belt market, in which NCHD’s main business operates, is expected to shrink due to decarbonisation efforts and reduced reliance on coal-fired power generation plants. In NCHD’s multi-storey parking business, competition is expected to intensify, and the business environment surrounding NCHD is extremely uncertain. Under these circumstances, for shareholders and investors to understand the future potential of NCHD, it is essential to provide a clear explanation of the medium- to long-term management vision and how the company intends to increase its corporate value and protect the common interests of all shareholders. However, NCHD refuses to publish a mid-term plan.
In addition, NCHD’s performance has been sluggish, with operating profits guidance for FY2024/3 expected to fall by almost 30% from three years ago. NCHD’s management has only blamed changes in the external environment for the poor performance and has not provided a clear explanation to investors.
NCHD has significant net cash equivalents amounting to almost 70% of its market cap, and the need to raise funds on the stock market appears to be limited. The directors of the company are expected to weigh up various strategic alternatives, including a review of the business portfolio and capital structure, in the best interests of all shareholders. However, it is believed that NCHD is proactively exploring all strategic alternatives, and there is a concern that the common interests of shareholders are being undermined.
NCHD’s difficult outlook, poor performance, lack of mid-term plan and long-term vision, inefficient balance sheet, and unwillingness to explore all strategic alternatives, have led NCHD’s share price to trade significantly below its intrinsic corporate value.
Since becoming a shareholder of NCHD in 2021, AVI, as a responsible institutional investor committed to the aims of the Stewardship Code, has privately conducted meaningful dialogue to try and enhance NCHD’s medium- to long-term corporate value and, in turn, the interests of all shareholders. However, it is unsure whether the current management and directors of the company are fully acting in the best interests of shareholders. Therefore, AVI, as a shareholder holding more than 20% of the voting rights of NCHD, has decided that it has a responsibility to act on improving the situation.
Considering this, AVI has submitted shareholder proposals for the best interests of all NCHD’s shareholders, which are summarised as follows:
- Election of Mr. Jiro Yasu and Mr. Philip Partnow, who have knowledge and experience of the capital market, as external independent directors
- Establishment of a ‘Strategic Review Committee’ to evaluate the company’s strategic alternatives in the best interests of all shareholders
- Increase the annual remuneration limit of the stock compensation plan for directors to JPY 150 million with TSR and ROIC targets
- Payment of a year-end dividend equivalent to a dividend payout ratio of 70%
AVI says that its proposals are submitted with the best interests of shareholders in mind by strengthening NCHD’s supervisory function and increasing discipline over management, where the interests of shareholders have not adequately been taken into account. AVI states that it had hoped that NCHD would have considered its proposals sincerely and engaged in proactive discussions with it. However, it thinks that the board has been operating without sufficient discipline, and has attempted to prevent its proposals from being approved. It says that this is highlighted by the board’s opposition to AVI’s shareholder proposals – the board has said that the proposals “will damage the corporate value” and “will harm the interests of shareholders,” without providing any evidence, says AVI.
Joe Bauernfreund, CEO of AVI, stated: “AVI is committed to a purposeful dialogue to benefit all shareholders of its investee companies. We have been seeking ways to bring NC Holdings’ value closer to its intrinsic value through friendly and constructive dialogue in private with NC Holdings’ management for two years since 2021. It is regrettable that, despite these efforts, management has not proactively listened to our recommendations, and we feel the situation is unlikely to improve. Having exhausted our attempts to keep our suggestions private, we have now, unfortunately, had to exercise our right to make shareholder proposals. We hope shareholders will see the benefit of our proposals, and if approved, that the board of directors will work with the strategic review committee and utilise the capital markets expertise of our two proposed directors to realise the best interest of all shareholders.”
AJOT : AVI Japan submits proposals to NC Holdings and SK Kaken