Daily BriefsJapan

Japan: Toshiba Corp, Japan Asia, Fanuc Corp, ZOZO Inc, Koei Tecmo Holdings, Tess Holdings Co Ltd, Omron Corp and more

In today’s briefing:

  • Toshiba Corp (6502 JP) Chapter 3: Activists up the Ante, with ESG and Hints of a New Twist
  • City Index Eleventh OFFICIALLY Launches Next Japan Asia Group (3751) Hostile Tender Offer
  • Fanuc – Early Warning Signs in China
  • Zozo – 2021 Conviction Call Short Unlikely to Hit Its GMV Targets
  • Koei Tecmo – Turning Cautious
  • Tess Holdings IPO – First Day Trading
  • Omron – Momentum More Than Priced In

Toshiba Corp (6502 JP) Chapter 3: Activists up the Ante, with ESG and Hints of a New Twist

By David Lepper

In our Chapter 2 note (Toshiba Corp (6502 JP) Chapter 2: Company Engages Stakeholders), when we addressed what was likely to happen next in this saga, we stated, “Activists to become more vocal via media regarding value.” and “several activists likely to continue the push for privatisation.” Less than a week later Toshiba’s second-largest shareholder 3D investment Partners (3D) wrote an open letter which in our view covered both of these points and more. We explore the key points made and conclude one unspoken option is becoming a very real option. Moreover, with 3D bringing ESG front and center of their demands they are ultimately forcing non-traditional activists to take sides in the debate. 

City Index Eleventh OFFICIALLY Launches Next Japan Asia Group (3751) Hostile Tender Offer

By Travis Lundy

Last November, after Japan Asia (3751 JP) had been trading in a ¥280-350/share range for many months, chairman Yamashita announced a convoluted bid to take the company private at ¥600/share. Janaghan Jeyakumar, CFA addressed this deal in Japan Asia (3751 JP) Management Buyout: Should There Be a BUMP? where the answer to the title question was YES. 

Noted Japanese activist Yoshiaki Murakami thought so too and one of his associated companies bought a large stake near the TOB price, then started buying more. And the stock quickly climbed 30% through terms. 

After accumulating 20% of the stock, they proposed a Tender Offer at 40% through terms at ¥840/share. 

There was a good reason for this. The original structure effectively allowed the chairman to put up a derisory sum buy the company with Carlyle’s help, then sell some hard assets to Carlyle for well more than the entire market cap of the company, and that left him with the stub businesses, which lose money, and an enormous pile of cash PLUS a residual stake in the asset businesses just sold. It was entirely the wrong price. 

When Murakami-san brought this up, he was rebuffed. Management and Yamashita-san thought so little of his proposal at 40% through that they did not let him do due diligence, then before his bidding entity could obtain approvals, Yamashita-san and Carlyle DOUBLED their bid to ¥1200/share through a little jiggering of how much Yamashita-san put in, and how much of the Sale Assets (notably the PV farm assets) would be held by the stub/residual business. 

Murakami-san again asked for due diligence, didn’t get it, so launched a Tender Offer at ¥1210/share. 

The Carlyle “MBO” ended up unsuccessful and to block the Murakami bid, on March 1st, the company decided to pay out a special dividend of ¥300/share AND to launch a poison pill rights issuance which would allow Murakami-san to be diluted. This would require a shareholder vote. The record date for both the dividend and the EGM was 18 March, which was just before the end of the Tender Offer on 22 March, which meant Murakami-san would be paying ¥300/share extra. So he withdrew the Tender Offer, then launched an injunction against the rights. He got the injunction, the company appealed, and won the conservation appeal, which was later dismissed. In the meantime, Murakami-san bought more shares on the dip and said that he would launch a new Tender Offer ¥300/share lower than the last one when the matter of the rights was settled.

The NEW News

Yesterday morning before the open, Japan Asia (3751 JP)  announced it was cancelling its planned rights issue.

Yesterday during the day the stock rose to ¥946 which was ~4% through the bid Murakami-san had planned. 

Last night, City Index Eleventh announced that it would launch its planned Tender Offer at ¥910/share (accompanying document link here).

So here we are again. Japan Asia Group, for its part, announced it would “consider the Tender Offer and respond with its Opinion Statement in a timely manner.”

Here we go again. 

Fanuc – Early Warning Signs in China

By Mio Kato

Fanuc beat consensus with OP reaching ¥112.5bn (¥107.7bn consensus) on revenue of ¥551bn (¥535bn consensus). The 4.5% OP surprise on a revenue beat of 3.0% is actually on the small side and the details point to some minor concerns. The major concern though is the read through to Fanuc’s expectations for China in the second half.

Zozo – 2021 Conviction Call Short Unlikely to Hit Its GMV Targets

By Mio Kato

Zozo released earnings today which were strong with OP of ¥44.1bn above consensus at ¥42.4bn and guidance of ¥41.5bn. For next year Zozo guided for ¥47.8bn in OP, just above consensus at ¥47.2bn. After examining the company’s guidance for GMV and margins we believe there is potential for a very juicy miss.

Koei Tecmo – Turning Cautious

By Mio Kato

Koei Tecmo generated ¥24.4bn in OP beating guidance of ¥22bn but coming in a touch below consensus of ¥25.0bn. Despite the slight miss and weak guidance of ¥24.5bn in OP vs. consensus ¥28.0bn for consensus we believe that consensus is too conservative, and OP will clear ¥30bn next year and potentially ¥45bn the year after. Despite THAT, however, we believe it may be time to step off this ride.

Tess Holdings IPO – First Day Trading

By Mio Kato

Tess Holdings opened at ¥2,010, 18.2% above its ¥1,700 IPO price answering our question regarding whether the market would price it on PE or EV/OP with the former. Risk-reward looks relatively balanced here but there should be an index inclusion event soon.

Omron – Momentum More Than Priced In

By Mio Kato

Omron Corp reported 4QFY21 results on Tuesday (27th April), which saw both revenues and operating profits increase YoY by 3.5% and 36.7% respectively. These were beats of 5.4% on revenue and 20.9% on OP vs. consensus.

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