Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><a href="https://www.smartkarma.com/entities/joban-kaihatsu-co-ltd" target="_blank" data-smartkarma-citation="entities:14588:1" rel="noopener">Joban Kaihatsu (1782 JP)</a> is a small cap construction/development company based in Fukushima which has run about US$150mm of revenue per year for the last five years, with semi-large <a href="http://www.jobankaihatsu.co.jp/work/building/results.html" target="_blank" rel="noopener">public and private construction projects</a> in and around Iwaki-City. They also do medium-scale public works projects in the area, including highways, bridges/overpasses, riverbeds, tunnels, slope management, etc. They also do environmental analysis. A lot of their work appears to be public sector work. </p><p>It is all-in-all a decent little contracting business with it appears, good OP Margin and Net Profit Margin on relatively little in the way of hard assets. For the last five years, they have averaged net profit of about ¥1.2bn a year. </p><p>A week ago, it was announced that Chairman Sagawa had proposed a Management Buyout at ¥7800/share and the Board had decided to accept and support the buyout. Like most MBOs, the goal is to "streamline management" and "create a system not bound by short-term results" and to promote "drastic structural reforms."</p><p>Most MBOs involve existing owners with significant stakes trying to get rid of meddlesome minorities.  This one involves Mr Sagawa, who owns 0.5% of shares out and has launched the bid, and the number one shareholder <a href="https://www.smartkarma.com/entities/joban-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:2826:1" rel="noopener">Joban Kosan (9675 JP)</a> (note the similarity of the name) which owns 12.8% and who has agreed to tender. Mr. Sagawa will own 90% and a director, Mr. Shinohara, will also stay on in management and will own 10%. </p><div class="content-highlight">
<p>That is a little unusual.</p>
<p>What is MORE unusual is that the Tender Offer Price values the entire company at ¥6.115bn while the company has a portfolio of net cash + securities of ¥7.00bn as of end-September.*</p>
<p>¥7bn of net cash + securities comes to ¥8,933/share. </p>
<p>Tangible Book Value Per Share is ¥12,233.</p>
</div><div class="content-remarks"><p>*All other Current Assets against all other liabilities comes out to be -¥300mm. The other LT Assets are an additional ¥2.5bn.</p></div><p>The company's recent 5-year history has seen an average of ¥16.4bn of revenue a year and roughly ¥1.84bn a year in OP - about 11% OP Margins. Despite the promised worsening revenue outlook, the management forecast used to calculate fair value is to see every year in the next six with revenue a <em>minimum</em><em>of ¥1bn higher than the average of the last five years</em>. Operating Profit, however, is scheduled to average 66% <em>lower</em> than the average of the past five years.</p><p>Nonetheless, despite margins dropping by 70% to 3.5% - lower than any SINGLE year since 2012, there is still positive value there and positive free cashflow. </p><p>Unfortunately, the "Independent Financial Advisor" looked at the DCF of this company with ¥8,933/share of net cash+securities and decided that the DCF value of the Company ranged from ¥7,149 to ¥8,520/share. They compared the company to four similar-sized construction and civil engineering companies (Tokura Corp, Moriya Corporation, Kaneshita Construction, and Sata Construction) to come up with a "similar company comparison method" which suggested a share price valuation of ¥6,812 - 8,458/share. <em>What the explanation does not tell you is that every single one of those four companies ALSO trades at a negative Enterprise Value when counting net cash + financial investments. Every single one. </em></p><div class="content-highlight">
<p>In effect, the Chairman is trying to buy the company at a discount to net cash + securities and take away the other net assets and the somewhat long-dated and visible cashflow for free.</p>
<p>And after reviewing the numbers the Board agreed (after getting the bidder to raise his bid four times from the original bid of ¥7,200/share).</p>
<p>There was zero effort to find a competing bid (it is not as if the Chairman with 0.5% was going to block) or obtain more value by selling securities and dividending out cash. </p>
<p>This is too small a situation for most people to care. It is almost comically illiquid for a tiny-cap with relatively high float. But it matters. Every situation that gets pushed through like this cements precedent that says it is OK to abuse shareholders.</p>
</div><div><p>As I suggested in <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>...</p></div><div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/725/original/image?1605806166" class="editor-image img-responsive" data-smartkarma-image-id="172725"></figure></div><div><div>
<p></p>
<p>Independent shareholders need to speak up. If you do not, you tacitly approve.</p>
<p>More below the fold.</p>
</div></div>

Joban Kaihatsu (1782 JP) is a small cap construction/development company based in Fukushima which has run about US$150mm of revenue per year for the last five years, with semi-large public and private construction projects in and around Iwaki-City. They also do medium-scale public works projects in the area, including highways, bridges/overpasses, riverbeds, tunnels, slope management, etc. They also do environmental analysis. A lot of their work appears to be public sector work. It is all-in-all a decent little contracting business with it appears, good OP Margin and Net Profit Margin on relatively little in the way of hard assets. For the last five years, they have averaged net profit of about ¥1.2bn a year. A week ago, it was announced that Chairman Sagawa had proposed a Management Buyout at ¥7800/share and the Board had decided to accept and support the buyout. Like most MBOs, the goal is to "streamline management" and "create a system not bound by short-term results" and to promote "drastic structural reforms."Most MBOs involve existing owners with significant stakes trying to get rid of meddlesome minorities.  This one involves Mr Sagawa, who owns 0.5% of shares out and has launched the bid, and the number one shareholder Joban Kosan (9675 JP) (note the similarity of the name) which owns 12.8% and who has agreed to tender. Mr. Sagawa will own 90% and a director, Mr. Shinohara, will also stay on in management and will own 10%. 
That is a little unusual.
What is MORE unusual is that the Tender Offer Price values the entire company at ¥6.115bn while the company has a portfolio of net cash + securities of ¥7.00bn as of end-September.*
¥7bn of net cash + securities comes to ¥8,933/share. 
Tangible Book Value Per Share is ¥12,233.
*All other Current Assets against all other liabilities comes out to be -¥300mm. The other LT Assets are an additional ¥2.5bn.The company's recent 5-year history has seen an average of ¥16.4bn of revenue a year and roughly ¥1.84bn a year in OP - about 11% OP Margins. Despite the promised worsening revenue outlook, the management forecast used to calculate fair value is to see every year in the next six with revenue a minimumof ¥1bn higher than the average of the last five years. Operating Profit, however, is scheduled to average 66% lower than the average of the past five years.Nonetheless, despite margins dropping by 70% to 3.5% - lower than any SINGLE year since 2012, there is still positive value there and positive free cashflow. Unfortunately, the "Independent Financial Advisor" looked at the DCF of this company with ¥8,933/share of net cash+securities and decided that the DCF value of the Company ranged from ¥7,149 to ¥8,520/share. They compared the company to four similar-sized construction and civil engineering companies (Tokura Corp, Moriya Corporation, Kaneshita Construction, and Sata Construction) to come up with a "similar company comparison method" which suggested a share price valuation of ¥6,812 - 8,458/share. What the explanation does not tell you is that every single one of those four companies ALSO trades at a negative Enterprise Value when counting net cash + financial investments. Every single one. 
In effect, the Chairman is trying to buy the company at a discount to net cash + securities and take away the other net assets and the somewhat long-dated and visible cashflow for free.
And after reviewing the numbers the Board agreed (after getting the bidder to raise his bid four times from the original bid of ¥7,200/share).
There was zero effort to find a competing bid (it is not as if the Chairman with 0.5% was going to block) or obtain more value by selling securities and dividending out cash. 
This is too small a situation for most people to care. It is almost comically illiquid for a tiny-cap with relatively high float. But it matters. Every situation that gets pushed through like this cements precedent that says it is OK to abuse shareholders.
As I suggested in Japan Needs More Cowbell...

Independent shareholders need to speak up. If you do not, you tacitly approve.
More below the fold.


SmallCap Joban Kaihatsu Founder Tries a Free MBO

Japan

Joban Kaihatsu Co., Ltd. is a general contractor based in Fukushima Prefecture. The Company constructs commercial, industrial, and institutional buildings. Joban, a member of Joban Kosan Group, also performs civil engineering works. Additionally, the Company operates real estate management, environmental pollution analysis, and waste management businesses.

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SmallCap Joban Kaihatsu Founder Tries a Free MBO

The MBO proposed by the Chairman of long-standing Fukushima local public works contractor Joban Kaihatsu (1782) comes at a level below the value of...

Travis Lundy