Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Companies that increased Tobin'sQ have further increased Tobin'sQ due to continued growth in ROE and ROA. They have room to further improve return on capital by reducing cash on hand.</li>
<li>Companies with lower Tobin's Q may include small-cap stocks that are increasingly undervalued because they have relatively high ROE and ROA but are not covered by overseas investors.</li>
<li>Over the past year, few companies raised their valuations based solely on expectations of P/B bottoming-out without improving profitability, and IR activities alone have had limited effect in boosting valuations.</li>
</ul>


Companies that increased Tobin'sQ have further increased Tobin'sQ due to continued growth in ROE and ROA. They have room to further improve return on capital by reducing cash on hand.
Companies with lower Tobin's Q may include small-cap stocks that are increasingly undervalued because they have relatively high ROE and ROA but are not covered by overseas investors.
Over the past year, few companies raised their valuations based solely on expectations of P/B bottoming-out without improving profitability, and IR activities alone have had limited effect in boosting valuations.


Improved Profitability to Attract Overseas Investors Key to Raise Valuation Even After TSE's Request

<ul>
<li>While communication with investors is an important tool, "TSE's request" should be the starting point for solving management issues, as it gave managers the opportunity to think about strategy themselves.</li>
<li>Since many Japanese companies have management issues, it is not surprising that more activist investors believe that investment opportunities can be created by encouraging companies to solve these issues.</li>
<li>Even if a company can convince activist investors through shareholder relations, it will only buy time, and investors/shareholders are looking to increase corporate value by solving problems.</li>
</ul>


While communication with investors is an important tool, "TSE's request" should be the starting point for solving management issues, as it gave managers the opportunity to think about strategy themselves.
Since many Japanese companies have management issues, it is not surprising that more activist investors believe that investment opportunities can be created by encouraging companies to solve these issues.
Even if a company can convince activist investors through shareholder relations, it will only buy time, and investors/shareholders are looking to increase corporate value by solving problems.


Investors Are Looking for Solutions to Challenges, Not Simply Improved Communication with Investors

<ul>
<li>Since shareholder proposals related to "TSE requests" are unlikely to be passed at the AGM, many companies are likely to have capital profitability improvement plans that merely indicate effort targets.</li>
<li>The outperformance of TOPIX by the company that announced the medium-term management plan can be attributed to the short-term outperformance of the company that announced the share repurchase.</li>
<li>Investors don’t trust the contents of "mid-term management plan" because they are focusing on more reliable shareholder return rather than betting on improving operating margins over the uncertain three-year horizon.</li>
</ul>


Since shareholder proposals related to "TSE requests" are unlikely to be passed at the AGM, many companies are likely to have capital profitability improvement plans that merely indicate effort targets.
The outperformance of TOPIX by the company that announced the medium-term management plan can be attributed to the short-term outperformance of the company that announced the share repurchase.
Investors don’t trust the contents of "mid-term management plan" because they are focusing on more reliable shareholder return rather than betting on improving operating margins over the uncertain three-year horizon.


Investors Still Do Not Trust the Profit Margin Improvement in the Mid-Term Management Plan

<ul>
<li>Excluding the special factor of companies applying transitional measures moving to standard, the pace of natural decrease of prime market listed companies is moderate.</li>
<li>Companies with high foreign shareholdings and large market capitalization are already highly valued. Companies that are not have investment opportunities that are often at a discount due to liquidity.</li>
<li>Nearly half of the companies are companies with large shareholders holding more than 20% equity; investment opportunities are expected to increase as companies go private through TOBs and MBOs.</li>
</ul>


Excluding the special factor of companies applying transitional measures moving to standard, the pace of natural decrease of prime market listed companies is moderate.
Companies with high foreign shareholdings and large market capitalization are already highly valued. Companies that are not have investment opportunities that are often at a discount due to liquidity.
Nearly half of the companies are companies with large shareholders holding more than 20% equity; investment opportunities are expected to increase as companies go private through TOBs and MBOs.


A Market with Small Value Stocks and Investment Opportunities Due to Delisting, Although Taking Time

<ul>
<li>Few companies have disclosed their cost of capital, so TSE provided specific indicators for this purpose. On the other hand, allergies to cost of capital disclosure are persistent in companies.</li>
<li>It is a concern that many companies still have more fixed remuneration than variable remuneration for compensation incentives, which are a mechanism for achieving capital profitability goals like ROE.</li>
<li>Engagement with overseas investors can be effective, but there are challenges, such as the existence of passive funds and companies with small market capitalizations that are not eligible for investment.</li>
</ul>


Few companies have disclosed their cost of capital, so TSE provided specific indicators for this purpose. On the other hand, allergies to cost of capital disclosure are persistent in companies.
It is a concern that many companies still have more fixed remuneration than variable remuneration for compensation incentives, which are a mechanism for achieving capital profitability goals like ROE.
Engagement with overseas investors can be effective, but there are challenges, such as the existence of passive funds and companies with small market capitalizations that are not eligible for investment.


Guidebook for Raising P/B Published, but Still Much Work to Be Done to Achieve Goals

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

Improved Profitability to Attract Overseas Investors Key to Raise Valuation Even After TSE's Request

I would like to discuss the issues on the characteristics and trends of the five groups of companies based on the percentage change in Tobin's Q.

Metrical Inc

Investors Are Looking for Solutions to Challenges, Not Simply Improved Communication with Investors

I would like to discuss the issues on the March 26 Nikkei article, "Mitsubishi UFJ Trust to Increase Headcount by 30% to Help Companies Counteract...

Metrical Inc

Investors Still Do Not Trust the Profit Margin Improvement in the Mid-Term Management Plan

I would like to discuss the the April 8 Nikkei article, "Expectations for Issues with 'Medium-Term Management Plans': Capital Efficiency...

Metrical Inc

A Market with Small Value Stocks and Investment Opportunities Due to Delisting, Although Taking Time

I would like to discuss the issues on the April 9 Nikkei Shimbun article, "Screening in TSE Prime Market: 20% Decrease in Number of Companies in 2...

Metrical Inc

Guidebook for Raising P/B Published, but Still Much Work to Be Done to Achieve Goals

I would like to discuss the issues on the TSE's March 31st disclosure document by TSE, "Measures to Achieve Management Conscious of Cost of Capital...

Metrical Inc