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SK Kaken: activist investor demands board changes and dividends


Fund manager Asset Value Investors has submitted shareholder proposals to SK Kaken Co. [TYO 4628] addressing two issues contributing to SK Kaken’s poor share price performance, low valuation, and potential delisting from the Tokyo Stock Exchange.

Tokyo-listed SK Kaken engages in the manufacture and sale of organic and inorganic water-based coating materials, synthetic resin paints, inorganic coating materials, and inorganic building materials in Japan and internationally. It is also involved in the contracting of special finishing works and the manufacture and sale of heat insulation materials, fireproof coating materials, fireproof paints, and contracting of fireproof insulation works, as well as various chemical products.

Despite a high-quality business model and having a dominant share of the domestic construction paint market, the company trades on an EV/EBIT ratio of less than 0.0x and a price-to-book ratio of just 0.7×1.

Over the last five years, SK Kaken’s share price has fallen -8%, while its domestic peer’s share price has risen +15% and the TOPIX has gained +91%. According to data from Bridgewise, the company is still a hold. Shares have rallied modestly since September, when stock was trading at Y6560. Bridgewise said that given the company’s recent financial performance, the stock is not projected to achieve significant outperformance compared to industry benchmarks.

With 420 shareholders, SK Kaken only narrowly meets the requirements for listing on the TSE Standard market.

Is SK Kaken being run as a lifestyle business?

According to Asset Value Investors, SK Kaken’s issues reflect “a lack of urgency and weak management discipline, a symptom often encountered at a company with a controlling shareholder.”

Currently over 40% of SK Kaken’s shares are owned by, and several 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,” said Joe Bauernfreund, CEO of Asset Value Investors.

“We submitted shareholder proposals for the last three years, and despite receiving strong support from non-Fujii family shareholders, SK Kaken has failed to reduce its excess treasury shares nor address its overcapitalised balance sheet,” Bauernfreund added.

Asset Value Investors 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 says it is again seeking to enhance SK Kaken’s corporate value through submitting shareholder proposals.

How to turn things around

Although more radical reform is needed than can be addressed through shareholder proposals alone, AVI says it has identified two easily addressable issues, aimed at sustainably enhancing SK Kaken’s corporate value:

  1. The cancellation of 90% of the 2,192,425 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.
  2. Increase the dividend from Y135 per share to Y290, representing a 50% pay out ratio. SK Kaken has hoarded earnings on its balance sheet, with cash and equivalents accounting for 71% of balance sheet assets.

Two directors of AVI Japan Opportunity Trust plan to attend the AGM to directly challenge the Fujii family’s fiduciary failure and neglect of minority shareholders. 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.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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