Sk Kaken Co., Ltd. · TSE:4628
Sk Kaken — Proxy Contest (May 2022)
31 slides from Sk Kaken's proxy contest presentation, May 2022
Slide 1: Painting a Better SK Kaken
PAINTING A BETTER SK KAKEN May 2022
Slide 2: Summary
Summary Asset Value Investors (“AVI”)(“we”) would like to thank SK Kaken employees for their stewardship of the Company during the difficult past few years and for the hard work and commitment that they have shown. SK Kaken is a wonderful company, with a rich history and well-renowned product offeri
Slide 3: Outline of SK Kaken's Issues
OUTLINE OF SK KAKEN’S ISSUES 3
Slide 4: Painting a Better SK Kaken
Painting a Better SK Kaken • SK Kaken is failing its responsibilities as a listed company with a falling share price, a woefully low valuation and barely meeting the listing requirements of the Tokyo Stock Exchange (“TSE”). • SK Kaken’s issues reflect a lack of urgency and weak management discipline
Slide 5: Share Price Underperformance
Share Price Underperformance − Over 5 years SK Kaken’s share price has underperformed all of its peers, both global and domestic. SK Kaken Share Price Underperformance − SK Kaken’s share price performance has significantly underperformed the 260 wider TOPIX index. 240 220 − Shareholders are sufferin
Slide 6: Relative Undervaluation
Relative Undervaluation − SK Kaken trades at a significant discount to its peer group Peer Group EV/EBIT Multiple − We do not attribute the extreme undervaluation to an inferior 35.3 33.1 business model. While SK Kaken has higher exposure to the domestic 23.8 24.8 25.0 market, current management 17.
Slide 7: Declining Profit
Declining Profit − Over 10 years SK Kaken’s profits have fallen by -1% − SK Kaken has generated the lowest SK Kaken 10 Year Profit Growth vs Peers profit growth of all its domestic and (local currency) international peers 414% − We attribute the poor performance to a lack of investment, failing to s
Slide 8: Employee Dissatisfaction
Employee Dissatisfaction Voices of current and former employees 1 − SK Kaken’s governance and mismanagement seem not to just “I question the fact that they did not try to “They call it meritocracy, affect shareholders but also SK change the old structure and were but in reality is more like Kaken’s
Slide 9: Potential Delisting from TSE
Potential Delisting from TSE − Despite being a well established large Number of SK Kaken Shareholders 1 company, SK Kaken barely meets the TSE Standard market listing requirements T he m inim um thres hold f or T SE Standard Mark et listing 409 − SK Kaken has 409 shareholders vs. 400 the minimum thr
Slide 10: AVI's Recommendations and Shareholder Proposals
AVI’S RECOMMENDATIONS AND SHAREHOLDER PROPOSALS 10
Slide 11: Overview of Shareholder Proposals
Overview of Shareholder Proposals • We are putting forward a non-exhaustive set of easily implementable actions to address SK Kaken’s underperformance and attract more shareholders to continue to meet the requirements for listing on the TSE Standard Market Issue Suggested solution (1) A 10-f or-1 st
Slide 12: Low Trading Liquidity
1 10-for-1 stock split Low Trading Liquidity • Over the past six months only Y1.5bn worth of SK Kaken shares have traded and on 28 trading days (out of total 121 days) no shares traded, making it hard for potential new shareholders to invest • In 2018, as part of the TSE’s efforts to standardise tra
Slide 13: Prohibitively High Minimum Investment Value
1 10-for-1 stock split Prohibitively High Minimum Investment Value • We partially attribute SK Kaken’s low liquidity to a prohibitively high minimum investment value of Y3,550,000, compared to the TSE’s recommended value of between Y50,000 and Y500,000 • To attract new shareholders and improve tradi
Slide 14: Treasury Share Overhang
2 Treasury share cancellation Treasury Share Overhang • 14% of SK Kaken’s shares are held in treasury. SK Kaken has put forward no plans to use its treasury shares, and despite committing to “examine cancelling treasury shares as well as other flexible capital policies” in its response to our shareh
Slide 15: Accumulation of Cash
3 Increase dividend payout ratio to 30% Accumulation of Cash • SK Kaken has allowed cash to accumulate on the balance sheet beyond reason • Cash, cash equivalents and investment securities account for 72% of balance sheet assets compared to 42% in 2000 and 63% five years ago • Cash less debt (net ca
Slide 16: Falling ROE
3 Increase dividend payout ratio to 30% Falling ROE • Despite what should be a high return on capital business, SK Kaken’s ROE has been falling, suffering from both a declining net income and ballooning shareholder equity • SK Kaken’s ROE is now at risk of falling below the 5% threshold required for
Slide 17: Lack of Investment Stifling Growth
3 Increase dividend payout ratio to 30% Lack of Investment Stifling Growth • SK Kaken’s hoarding of cash has come at the expense of investment in CAPEX and M&A. Only 12% of cash flows generated over the past 10 years has been either returned to shareholders or invested • SK Kaken has not undertaken
Slide 18: Low R&D Expenditure, Despite Cash Reserves
3 Increase dividend payout ratio to 30% Low R&D Expenditure, Despite Cash Reserves • SK Kaken has allocated only 0.9% of sales to R&D over the past five years • With such a high amount of accumulated cash, SK Kaken can afford to be more aggressive in its R&D spending especially given how much smalle
Slide 19: SK Kaken Shareholder Returns
3 Increase dividend payout ratio to 30% SK Kaken Shareholder Returns • SK Kaken’s peers have consistently paid out a higher portion of profits to shareholders while also allocating more aggressively to growing the business through CAPEX and acquisitions • SK Kaken’s statement in their response to ou
Slide 20: Poor Corporate Governance
4 Shorten Director Terms from two to one year 5 Appoint At Least Two Independent Directors Poor Corporate Governance • SK Kaken’s homogenous board lacks diversity, with only one outside director and all inside directors having similar backgrounds • All directors are male and Japanese, with an averag
Slide 21: Ratio of Independent Directors to Peers
4 Shorten Director Terms from two to one year 5 Appoint At Least Two Independent Directors Ratio of Independent Directors to Peers • Not only does SK Kaken have fewer independent board members it has made no efforts to improve independence over the past three years, unlike peers Percentage of indepe
Slide 22: Ratio of Female Directors to Peers
4 Shorten Director Terms from two to one year 5 Appoint At Least Two Independent Directors Ratio of Female Directors to Peers • SK Kaken has no female representation and has made no efforts to improve diversity over the past three years, unlike peers Percentage of female directors As of 2018 As of 2
Slide 23: Corporate Governance Code
4 Shorten Director Terms from two to one year 5 Appoint At Least Two Independent Directors Corporate Governance Code • Strengthening board diversity is called for in the Corporate Governance Code Corporate Governance Code Principle 4.11 Preconditions for Board and Kansayaku Board Effectiveness The b
Slide 24: Director Terms
4 Shorten Director Terms from two to one year 5 Appoint At Least Two Independent Directors Director Terms • SK Kaken’s Kansayaku board structure adopts two year terms for its directors preventing shareholders from expressing their views annually • Companies listed on the TSE have been increasingly a
Slide 25: Improving Corporate Governance
4 Shorten Director Terms from two to one year 5 Appoint At Least Two Independent Directors Improving Corporate Governance • Given the founding family’s control over the Company it is vital that SK Kaken adopts the highest quality of corporate governance to protect minority shareholders • SK Kaken’s
Slide 26: Responsibility to Proactively Address Environmental Impact
6 Lack of Environmental Policy Responsibility to Proactively Address Environmental Impact • Climate change is perhaps the biggest global challenge we Top Global Risks by Severity Over the next 10 years face, failure to act will have devastating consequences • The chemical sector is the largest indus
Slide 27: Significantly Lagging Peers and Industry Standards
6 Lack of Environmental Policy Significantly Lagging Peers and Industry Standards • All of the 42 companies in the chemical sector assessed by the Transition Pathway Initiative (TPI) receive a score of Level 2 – Level 4. SK Kaken would receive Level 0 - Unaware • In May 2021, Japan Chemical Industry
Slide 28: Exposure to an Evolving Regulatory Environment
6 Lack of environmental policy Exposure to an Evolving Regulatory Environment • In October 2020, Japan pledged to reach net-zero emissions by 2050, (46% reduction by 2030). • Climate Action Tracker assesses that Japan’s current policies will only lead to a reduction in emissions of 25-35% below 2013
Slide 29: Conclusion
AV | Asset Value Investors CONCLUSION 29
Slide 30: Painting a Better SK Kaken
Painting a Better SK Kaken - We ask general shareholders to support six modest and easily implementable improvements to address SK Kaken’s underperformance and failings - While the six measures will only go so far in improving the situation, it would mark an excellent step in the right direction and
Slide 31: Disclaimer
Disclaimer This presentation and the information contained herein (the “Presentation”) has been prepared for shareholders of SK Kaken CO., LTD. (“SK Kaken”) for the sole purpose of providing the information. Asset Value Investors Limited (“we” or “AVI”) has the authorization and is subject to the re