MIGO Opportunities Trust PLC GBP · LSE:MIGO
MIGO Opportunities Trust PLC GBP — Teikoku Sen-I — Proxy Contest (January 2020)
30 slides from MIGO Opportunities Trust PLC GBP's proxy contest presentation, January 2020
Slide 1: Transforming Teikoku
TRANSFORMING TEIKOKU — Asset Value Investors 25 Bury Street London SW1Y 6AL
Slide 2: Introduction to AVI
Introduction to AVI Specialised international equity boutique – founded in London in 1985 – Long-term shareholder Experience in Japan – investing in Japan for over two decades – ¥55bn invested in Japanese companies – Public campaign www.improvingtbs.com conducted in 2018, drawing considerable attent
Slide 3: The Problem (Teikoku Sen-I TSE:3302)
THE PROBLEM (TEIKOKU SEN-I TSE:3302) 3
Slide 4: Summary – The Problem
Summary – The Problem • Teikoku is a high-quality business, providing essential disaster prevention equipment through an impressive distribution network • Its share price and corporate value are being suppressed by an inefficient balance sheet, with 70% of assets held in low-returning cash and inves
Slide 5: Engagement History with Teikoku
Engagement History with Teikoku • AVI, on behalf of its clients, owns 5.2%1 of Teikoku’s outstanding shares • We have been shareholders since March 2018 • From the beginning we have sought to work constructively with Teikoku • Open discussions with Teikoku’s directors and management Meeting 1 June 2
Slide 6: Teikoku's Business Overview
Teikoku’s Business Overview • The market leader and experienced PROTECTIVE CLOTHING manufacturer of fire hoses in Japan – 45%1 market share • Building on this strong base, Teikoku has developed a diverse and high- quality product mix FIRE HOSES SUPPORT VEHICLES 1Estimated value from IR meeting 6
Slide 7: Impressive Track Record
Impressive Track Record • In the early 1990s as the Japanese Teikoku’s Restored Balance Sheet Equity textile industry declined, Teikoku found Ratio (equity/assets) itself in a precarious financial position 80% 60% 40% • Chairman Iida and President Shiraiwa, 20% who both joined the board at this time
Slide 8: Teikoku is a High-Quality Business
Teikoku is a High-Quality Business • Market demand is robust: Japan is especially vulnerable to natural disaster. Safeguarding against and recovery from them will continue be a high priority for the Japanese government • In the last few years alone the government allocated trillions of yen to disast
Slide 9: Value Destructive Balance Sheet
Value Destructive Balance Sheet • Quality business is hidden under a mountain of non-core assets • 70% of balance sheet assets are allocated to low returning net cash and investment securities • These have a return on equity to Teikoku of less than 1% Teikoku's Asset Breakdown (¥m) Non-core assets,
Slide 10: Caused by the Senseless Accumulation of Cash…
Caused by the Senseless Accumulation of Cash… • Teikoku has a strong and profitable business which coupled with low capital expenditure means it generates an abundance of free cash flow1 • Companies can allocate free cash flow in four ways, doing nothing is the least productive and destroys potentia
Slide 11: …and an Unjustifiably Large Stake in Hulic
…and an Unjustifiably Large Stake in Hulic • Teikoku has given no quantitative justification for its ¥23bn investment in Hulic • It has blindly allowed its stake in Hulic to grow in value such that it now accounts for over 30% of total assets • Principle 1.4 of the Corporate Governance Code states t
Slide 12: Teikoku's Low ROE Due to Weak Capital Efficiency
Teikoku’s Low ROE Due to Weak Capital Efficiency • Teikoku’s net profit margin is far higher than both the average Japanese company and closest peer, Morita, which has a similar product mix to Teikoku • But Teikoku’s ROE is barely above the average and below Morita’s Net Profit Margin Turnover Ratio
Slide 13: Teikoku's ROE Below Cost of Capital
Teikoku’s ROE Below Cost of Capital • Teikoku seems to underappreciate the importance of cost of capital • Teikoku’s estimated 2019 ROE of 7.6% is below our estimated 7.8% cost of capital1 and below the minimum 8.0% recommended in the Ito review Teikoku ROE Less Cost of Capital 13.2% 8.6% 8.1% 7.7%
Slide 14: An Inefficient Structure for Shareholders Destroys Corporate Value
An Inefficient Structure for Shareholders Destroys Corporate Value • Non-core assets trapped in Teikoku are valued by the market at a discount to their real value • Teikoku’s 2.6% in Hulic accounts for 25% of Teikoku’s market cap (after capital gains tax), and cash accounts for 34% of Teikoku’s mark
Slide 15: Japan Trades at Discount to Global Markets
Japan Trades at Discount to Global Markets • Japanese companies are undervalued relative to other global indices Undervalued Japan 25 4 21.5 3.4 • Teikoku’s unhealthy balance sheet and blind support 20 16.4 3 from “group shareholders” is a symptom across 14.1 15 1.9 corporate Japan 2 10 1.2 1 • It i
Slide 16: The Solution
THE SOLUTION 16
Slide 17: The Solution
The Solution • Status quo of low pay-out ratios and excessive accumulation of cash is not an adequate strategy • Obvious way to reverse value destruction is to sell down/distribute stake in Hulic and return cash to shareholders Solution Current Stance Sell or distribute stake in Hulic Unjustifiably
Slide 18: Teikoku Could Achieve a Much Higher ROE
Teikoku Could Achieve a Much Higher ROE • Underneath Teikoku’s inefficient balance sheet hides a phenomenally high-quality business • Due to its capital light model, Teikoku could achieve a substantially higher ROE • Matching the capital efficiency* of the average Japanese company, Teikoku could gen
Slide 19: The Obstacle: Group Shareholders
T H E O B S TA C L E : “GROUP SHAREHOLDERS” 19
Slide 20: Previous Shareholder Proposals
Previous Shareholder Proposals • Over the past two years, Sparx submitted proposals to Teikoku similar to those AVI is submitting this year • These drew attention to Teikoku’s inefficient balance sheet, its growing cash pile, and its stake in Hulic • Despite being in shareholders’ best interests, th
Slide 21: Blocked by Teikoku's Group Shareholders
Blocked by Teikoku’s Group Shareholders • “Group Shareholders” vote with management based on historic business ties, even though doing so supports corporate value destruction • They blocked Sparx’s proposals and implicitly supported continued corporate value destruction • Core members of Teikoku’s “
Slide 22: Supported by Institutional Shareholders
Supported by Institutional Shareholders • Both domestic and foreign shareholders supported proposals for a higher dividend last year • These institutions voted rationally in the best interests of all shareholders 22
Slide 23: It Is Time for Teikoku's Group Shareholders
Teikoku Group Shareholders • IT IS TIME FOR TEIKOKU’S “GROUP SHAREHOLDERS” TO STOP VOTING PASSIVELY WITH MANAGEMENT, AND TO VOTE IN THE INTERESTS OF ALL SHAREHOLDERS AND BEST GOVERNANCE PRACTICES Source: AVI 23
Slide 24: Our Shareholder Proposals
OUR SHAREHOLDER PROPOSALS 24
Slide 25: Shareholder Proposals
Shareholder Proposals • Our proposals are intentionally modest • Proposals are intended to be a first step toward much-needed balance sheet reform that Teikoku’s shareholders can accept in the short-term • If Teikoku’s “Group Shareholders” will acknowledge the need to reform Teikoku’s balance sheet
Slide 26: We Welcome Further Input
We Welcome Further Input • We invite all stakeholders or interested parties to get in touch at info@transformingteikoku.com • Visit our dedicated website www.TransformingTeikoku.com for further information 26
Slide 27: Appendix
APPENDIX 27
Slide 28: Appendix I – Teikoku's Cost of Capital
Appendix I – Teikoku’s Cost of Capital • Misunderstanding by some companies surrounding the cost of equity (CoE): Dr Ryohei Yanagai, Ito Review member, commented that old-guard CEOs “understand the cost of debt. But the cost of equity is invisible,” as they don’t have to pay cash to service it. • Te
Slide 29: Appendix II – Teikoku's ROE
Appendix II – Teikoku’s ROE • ROE is as much related to balance sheet efficiency (‘E’) as it is profits (‘R’) • While Teikoku has been successful on the profit side it has failed to consider how equity can impact corporate value • For illustrative purposes we have shown how Teikoku’s ROE would have
Slide 30: Appendix III – Share Price Upside on Higher ROE
Appendix III – Share Price Upside on Higher ROE • If Teikoku reduced the excess capital on its balance sheet through a buyback it could dramatically increase its corporate value • Buying back ¥34bn worth of shares (54% of outstanding), at prevailing share prices, would result in an ROE of 20.3% and