Daily BriefsJapan

Japan: Shoko Co Ltd, Mcdonald’s Holdings Co Japan, Kyokuto Kaihatsu Kogyo Co, SpiderPlus & Co, BASE Inc, SCREEN Holdings and more

In today’s briefing:

  • Shoko (8090 JP) TOB:  Still Looks Bumpity
  • TOPIX Inclusion Trade Summary: Mar 2021
  • Japan Value:  Kyokuto Kaihatsu (7226) To Log BIG Special Profit – Governance Activism Target
  • SpiderPlus IPO – First Day Trading – A Little Upside Left?
  • Base Inc: Splits Shares & Institutional Investors Are Taking Profits Amidst Slowing Growth
  • Screen Holdings (7735 JP): Aiming at 2nm Process Technology

Shoko (8090 JP) TOB:  Still Looks Bumpity

By Travis Lundy

Functional chemicals trading house Shoko Co Ltd (8090 JP) parent Showa Denko K.K. (4004 JP) announced earlier this month that it was going to support a Tender Offer whereby a third party would launch a tender offer with the aim to buy 85% of the subsidiary.

Showa Denko would retain 15%.

The price came in below the average of the high and the low of the DCF range. The deal is at an EV of 3.3x the 5-year average EBITDA. That masks the fact that the company runs about 4.0x average EBITDA in net receivables (2.5x) and securities holdings (1.5x – not included as assets in the DCF).

Procedural adherence to the METI Fair M&A Guidelines? Minimal at best. 

There is a shareholder agreement in place between the two future shareholders and the deal was that the new buyer would agree to keep all employees on for 3 years. 

For that, Showa Denko is supporting the sale of minorities’ shareholdings to the new buyer at a substantial discount to book value. 

The market so far has not appreciated this and the shares are only in the last couple of days trading down to the Tender Offer level. 

The yuho came out today, which gives us more insight into the shareholder structure as of just before the launch of the Tender Offer. 

More discussion below.

TOPIX Inclusion Trade Summary: Mar 2021

By Janaghan Jeyakumar, CFA

In January and February we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented. In contrast, not a single TSE1 Section Transfer was announced in the month of March 2021. 

However, this is only the calm before the storm.

In April 2021, we are expecting dozens of companies to enjoy TOPIX Index upweights as a result of the annual liquidity factor review (and this will mean dozens of downweights too). On the other hand, although fewer companies will qualify under the new rules, small-cap companies could use M&A as an alternative route to Section Transfers to meet criteria as discussed below in this insight.

Furthermore, I have discussed the changes to Quiddity’s pre-events watchlist and provided performance updates for one “Live” event stock which is expected to have its Inclusion event at the end of April 2021 and 9 “Post” event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. 

Japan Value:  Kyokuto Kaihatsu (7226) To Log BIG Special Profit – Governance Activism Target

By Travis Lundy

Kyokuto Kaihatsu Kogyo Co (7226 JP) is, and has been for a a couple of decades, a value-stock player’s dream. This company makes garbage trucks, dump trucks, concrete mixer trucks, sprinkler trucks, and truck parts such as lifters, etc.  They also make multi-story metal parking frames which can be sited easily on empty lots for those who want to use land but not redevelop.

The company has been cash-rich and asset-rich for ages – sometimes more so, sometimes less so – and has had hidden assets to boot. 

The stock tends to “range-trade” around a range of PBR, dipping when earnings dip and rising as people get excited about trucks. But despite being a stock which some might call a value-trap, it has done pretty well over the years. Sometimes it gets REALLY cheap. 

The NEW News

On March 30, the company announced the sale of one of its “hidden assets” with the contract signed today and the close expected in the fiscal year which starts April 1. 

It is worth looking at this company just to see what else it might spit out. 

SpiderPlus IPO – First Day Trading – A Little Upside Left?

By Mio Kato

SpiderPlus offers attractive exposure to labour-saving software focused on Japan’s construction industry which is facing a manpower shortage that should become increasingly chronic over time. However, we question whether this is all priced in given that our analysis suggests a relatively low ceiling for the company’s profit margins.

Base Inc: Splits Shares & Institutional Investors Are Taking Profits Amidst Slowing Growth

By Oshadhi Kumarasiri

Today, BASE Inc (4477 JP) conducted its planned 1:5 stock split, couple of days ahead of the schedule. The split was conducted to increase the liquidity of Base Inc shares via lowering the minimum investment amount from around ¥800,000 to ¥150,000. Nonetheless, the company’s share price is down 6% from yesterday’s close price on a split adjusted basis, compared to a daily price performance of -1.2% for the Topix IT & Services sector index.

Screen Holdings (7735 JP): Aiming at 2nm Process Technology

By Scott Foster

On March 24, the Nikkei newspaper reported that Tokyo Electron (TEL) (8035 JP), Canon (7751 JP) and Screen Holdings will cooperate with Japan’s National Institute of Advanced Industrial Science and Technology (AIST) to develop “next-generation production technology in the 2-nanometer process and beyond by the mid-2020s.”

In response to our inquiries, Tokyo Electron and Canon said “No Comment,” but Screen told us that (1) The article is basically true, (2) Only these three companies seem to be involved, and (3) This is a new activity for Screen.

This should help Japanese equipment makers support TSMC, which is now targeting commercial production with 3-nm process technology in 2022. It is also a reminder that Screen, like TEL, is a long-term investment.

Screen’s share price has risen by 16% since we last wrote on the company at the beginning of February. But there remains 24% potential upside to our ¥12,000 share price target.

Before it’s here, it’s on Smartkarma