Japan activists seek smaller fish to fry

Dai Nippon Printing Co

07/02/2023 12:56

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own. Updates to add chart.)
    By Pete Sweeney
       HONG KONG, Feb 7 (Reuters Breakingviews) - Foreign
investors in Japan may be frustrated with campaigns to
rationalise politically powerful but poorly governed giants like
Toshiba  6502.T . Fortunately there are smaller guys to pick on.
Elliott Management is after $6 billion Dai Nippon Printing
 7912.T ; Oasis is hectoring $1.8 billion Fujitec  6406.T . 
    The Toyko Stock Exchange is loaded with excessively
diversified conglomerates hoarding cash and maintaining stakes
in each other that help them fight off minority shareholders.
Travis Lundy, an analyst who writes for SmartKarma, argues this
is equivalent to shorting your own company’s stock while going
long on peers. 
    DNP, for example, controls over half the global market for
pouches covering lithium-ion batteries, and claims top share in
metal masks for smartphone OLED displays. These highly
profitable operations are dragged down by off-topic subsidiaries
like a publishing division and “packaging materials for
tourism-related souvenirs”; its flagging beverages unit has a
paltry 1.4% operating margin. 
    The balance sheet is extremely inefficient. DNP reported
stakes in listed companies worth some 410 billion yen ($3.1
billion) as of March 2022, plus 143 billion yen in net cash, per
Eikon data. Combined that’s more than two-thirds of its market
capitalisation. Deduct the strategic equity portfolio, cash and
net receivables from its enterprise value, and DNP is worth less
than one year’s EBITDA, pointed out CLSA analyst John Segrim.
The company also trades at a discount to its book value, making
it an outlier among peers. 
    Proxy adviser ISS recommends shareholders vote against DNP
top executives if they allocate over 20% of its assets to
cross-shareholdings, noting that they equate to 37% of DNP’s
assets.  
    The company is nowhere near as connected as Toshiba or
Samsung, and management is already reducing its
cross-shareholdings, in line with a national trend. Elliott
could make money simply by forcing the pace: DNP shares popped
20% after media reported its stake. Macroeconomics are also
supportive: Bruce Kirk of Goldman Sachs argues rising inflation
will push Japanese investors to seek higher-yielding assets,
which should squeeze executives to improve returns on equity. 
    Success would encourage activists to target other good
Japanese businesses discounted by massive cross-holdings, like
Fujitsu  6702.T . 
    On the other hand neither DNP nor Fujitec are walkovers;
both are run by families that have resisted change for years. If
even this lower-hanging fruit proves too hard to pick, pushy
shareholders may pause for a rethink.
    Follow @petesweeneypro on Twitter
    CONTEXT NEWS
    Hedge fund Elliott Management has built a "significant"
stake in Japanese automotive battery component supplier Dai
Nippon Printing, Reuters reported on Jan. 24 citing sources
familiar with the matter.
    The company, in response to questions from Breakingviews,
confirmed Elliott’s investment but declined to discuss any
details of its engagement. “We are planning a briefing in March
to present the main pillars of a new medium-term business
strategy to investors,“ it added.  
    In May 2022 hedge fund Oasis published a criticism of
governance and strategy at elevator maker Fujitec, advocating
for new outside directors, among other changes. The company
plans to hold an extraordinary shareholder meeting on Feb. 24.
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic: Fujitec and DNP shares rallied on activist pressure   
https://tmsnrt.rs/40xhvv5
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Antony Currie and Katrina Hamlin)
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