(Stock Code: 1861 JT)
*Oasis proposes a dividend of JPY160 per
share
*Oasis recommends shareholders vote against the
reappointment of Chairman Yasunori Sakurano, Sumitomo Forestry alum
Tatsuru Sato, and Nomination Committee Chair Shigeru Okada
Oasis Management Company Ltd. (“Oasis”) is the manager to funds
that beneficially own over 10% of Japanese construction company
Kumagai Gumi Co., Ltd. (1861 JT) (“Kumagai Gumi” or the “Company”).
Oasis has adopted the Japan FSA’s “Principles of Responsible
Institutional Investors” (a/k/a the Japan Stewardship Code) and in
line with those principles, Oasis monitors and engages with its
investee companies.
Oasis urges its fellow shareholders to vote FOR its shareholder proposal for a dividend of
JPY 160 per share and vote AGAINST the reappointment of Chairman Yasunori
Sakurano and incumbent directors Tatsuru Sato and Shigeru Okada at
the upcoming 2024 AGM.
Vote FOR the Oasis
Proposal
Dividend of JPY 160 per share (currently JPY
130)
In Kumagai Gumi’s new medium-term management plan, the Company
projects that its ordinary income will double from JPY 15.7 billion
in FY2024/03 to JPY 30 billion by FY2027/03. Yet, despite improving
profitability, the Company reduced its ROE target from 12% to 10%.
This mismatch of increasing ordinary income coupled with a
decreasing ROE target indicates that the Company’s management is
not planning on improving capital efficiency. In fact, it’s
planning on reducing its capital efficiency. With the projected
doubling of ordinary income and the current equity ratio, which is
on par or better than its peers, the Company should improve its
capital efficiency.
Kumagai’s construction competitors have formulated dividend
policies based on either high dividend-on-equity (DOE) ratios that
allow for stable dividends, or higher payout ratios. For example,
Obayashi has set a DOE ratio of 5% and Tokyu Construction has set a
4% DOE ratio. Hazama Ando and Nishimatsu both increased their
dividend payout ratios to 70%. This compares to Kumagai Gumi’s
current dividend of JPY 130 per share, which is equivalent to a
payout ratio of 67% and a DOE of just 3.1%, well below peers.
Oasis strongly recommends that Kumagai
Gumi set its dividend at a minimum of JPY 160 per share.
Kumagai Gumi should adopt a dividend policy that sets the payout
ratio at the higher of a minimum of 50%, or a DOE ratio of at least
4%. This would translate into a dividend of JPY 160 per share,
based on book value per share (“BPS”) as of FY2024/03 of JPY 4,185
and EPS for FY2024/03 of JPY 192. This amounts to a total dividend
payment of approximately JPY 6.9 billion, which is feasible based
on JPY 8.3 billion of net profit for FY2024/03 and easily
sustainable in the future. Oasis believes that by improving its
dividend policy and implementing continuous buybacks, the Company’s
share price should well exceed JPY 5,200 per share.
Kumagai Gumi’s reasons for rejecting
the Oasis proposal should not be trusted. Kumagai’s
Board has opposed Oasis’s proposal to increase the dividend. As for
the reason for the opposition, the Company claimed that the equity
ratio dropped to 38.5% because of the increased amount of accounts
receivable from completed construction contracts. However, the
lower equity ratio is caused by an overcapitalized balance sheet
and poor capital allocation policies, and the increase in accounts
receivable is likely to be temporary. The equity ratio could be
easily increased by the sale of Sumitomo Forestry shares and other
cross-shareholdings and poor investments, and reduction of debt
would push the equity ratio above 45%. Additionally, Kumagai’s 45%
equity ratio threshold in its new Medium-term Plan is higher than
competitors which target a 35-40% ratio, and higher than what we
think is reasonable. Shareholders should not be made to suffer for
poor management decisions. Kumagai is using an unnecessarily high
equity ratio as an excuse to not raise returns to shareholders.
Paying a JPY160 per share dividend amounts to only an additional
JPY1.3 billion, which, if necessary, could be financed through a
small reduction in the Company’s investment budget. At the start of
the last Medium-term Plan, the Company planned to generate JPY7
billion annually from its investments from FY2023/03. However, it
managed to only generate JPY400m in total over three years from
FY2021 to FY2023. In its newest Medium-term Plan, the Company now
hopes to generate JPY4 billion cumulatively, including for prior
investments, from an additional investment of JPY40 billion, which
appears highly unrealistic, having only achieved a 2.5% return on
its investments in the previous Medium-term Management Plan.
Instead of wasting capital on low return investments,
shareholders should demand that Kumagai bolster its shareholder
returns by supporting the Oasis proposal. Oasis’s proposed dividend
of JPY 160 per share is modest when compared to Kumagai Gumi’s
current dividend of JPY 130 per share, its balance sheet, and
profitability, and is thus easily achievable.
Vote AGAINST the
Company’s Proposal to Reappoint Directors Sakurano, Sato, and
Okada
Oasis recommends shareholders vote AGAINST the reappointment of
Chairman Yasunori Sakurano, as well as Tatsuru Sato, Special Komon
of Sumitomo Forestry, and Shigeru Okada, Chair of the Nomination
Committee.
Chairman Sakurano’s tenure as president from April 2018 to March
2024 has been a failure for all Kumagai Gumi stakeholders. During
his tenure, Kumagai has:
- Failed to hit the targets set in the Medium-term Management
Plan (FY2021-2023), with ordinary income achieving just JPY13
billion, compared with the budgeted JPY33 billion.
- Fallen well below guidance for the year-ending March 31, 2024,
with operating profit and net income coming in 16.8% and 20% below
target, respectively.
- Decreased ROE from 15.27% in the year prior to Chairman
Sakurano’s appointment to just 4.6% this year, the lowest in a
decade and well below the 12% ROE forecasted in the prior
Medium-term Management Plan.
- As disclosed by Kumagai itself, the Company’s investments have
destroyed value. In its last Medium-term Management Plan, Kumagai
invested JPY17 billion but only generated income of JPY400 million,
a return of just 2.4% which is less than half of the Company’s 5.7%
cost of capital.
Oasis recommends shareholders vote AGAINST the reappointment of
Tatsuru Sato. Sato, formerly a director of Sumitomo Forestry and
now a special advisor (Tokubetsu Komon), represents the failed
capital alliance with Sumitomo Forestry. The cross-shareholding has
benefited Sumitomo Forestry but has provided no tangible benefits
to Kumagai and is just a distraction. Oasis does not believe that
retaining Sato provides the Company with any benefit:
- The capital alliance with Sumitomo Forestry has not generated
meaningful synergies and there is no evidence that Kumagai will be
able extract synergies in the next Medium-term Plan.
- Tatsuru Sato resigned his directorship at Sumitomo Forestry but
remains a paid special adviser. This causes substantial
conflicts-of-interest, as can be seen from Kumagai investing solely
into Sumitomo Forestry’s overseas funds without comparison to other
funds.
- Sato’s expertise in administrative management is replicated by
Koji Hidaka and adds no additional value.
- Sato is not even in charge of the relationship with Sumitomo
Forestry, which is managed by representative director Koji
Okaichi.
Oasis recommends shareholders to vote AGAINST the reappointment
of Shigeru Okada, the chairperson of Kumagai’s Nomination
Committee, for the following reasons:
- Okada has repeatedly approved the renomination of Chairman
Sakurano, despite his continued failure to hit targets during his
time as president of Kumagai Gumi.
- Okada has also approved the renomination of director Sato, who
has a clear conflict-of-interest with Sumitomo Forestry and
represents the failed capital alliance.
Kumagai Gumi has consistently failed to achieve the targets it
has set for itself. There is little evidence that anything has
changed at the Company to give shareholders comfort that it will
hit the targets in its new Medium-term Plan. Dramatic change is
needed at Kumagai and, as a result, we are reaching out to other
shareholders to hold Kumagai’s board of directors accountable for
consistent operational failures and poor capital allocation.
We urge Kumagai Gumi to embrace accountability by management,
equal treatment of all shareholders, and enhanced shareholder
returns.
Oasis asks shareholders to vote FOR its shareholder proposal and emphasize the
importance of capital efficiency to Kumagai’s management, and vote
AGAINST the reappointment of
Yasunori Sakurano, Tatsuru Sato and Shigeru Okada, at the Company’s
upcoming AGM.
***
Oasis Management Company Ltd. (“Oasis”) manages private
investment funds focused on opportunities in a wide array of asset
classes across countries and sectors. Oasis was founded in 2002 by
Seth H. Fischer, who leads the firm as its Chief Investment
Officer. More information about Oasis is available at:
https://oasiscm.com. Oasis has adopted the Japan FSA’s “Principles
of Responsible Institutional Investors” (a/k/a Japan Stewardship
Code) and in line with those principles, Oasis monitors and engages
with our investee companies.
The information contained in this press release (referred to as
the "Document") is an information resource for shareholders in
Kumagai Gumi offered by Oasis, the investment manager to funds that
are shareholders of Kumagai Gumi (the "Oasis Funds"). The Document
is not intended to solicit or seek shareholders' agreements to
jointly exercise any voting rights with Oasis. Shareholders that
have an agreement to jointly exercise their voting rights are
regarded as Joint Holders under the Japanese large shareholding
disclosure rules and they must file notification of their aggregate
share ownership with the relevant Japanese authority for public
disclosure under the Financial Instruments and Exchange Act. Oasis
does not intend to be subjected to such notification requirement.
The Document exclusively represents the opinions, interpretations,
and estimates of Oasis.
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