ESG

• Although it’s possible to move AGM forward given the timing of financial reporting, 70% of companies will hold their AGM during the 3 days of the last week of June.
• As long as the concentration of AGM dates continues, the start of electronic provision of AGM documents should at least be accelerated to allow time to review the agenda.
• Only slightly less than 30% of prime market listed companies provide English translations of all convocation notices, including business reports and financial statements.

• 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.

• 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.

• 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.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
Sappi’s ESG is “Strong”, driven by its “Strong” Environmental and Governance scores. The Social score is “Adequate”. Controversies are “Immaterial” and Disclosure is “Strong”. 

Sappi is a constituent of the FTSE4Good Index. All of the company’s regions (Europe, North America and South Africa) received a Platinum rating from EcoVadis for corporate social responsibility in FY 2022. The Platinum rating recognises the Top 1% of companies evaluated by EcoVadis.

• 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.

• 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.

• Code of Corporate Conduct lacks explanation of the role to be played by a listed company and the background. Consequently, there’re cases where the same companies have repeatedly committed misconduct.
• For companies that are good at pretending that they are trying, without any substance to their corporate governance, making the provisions of Corporate Governance Code mandatory effort won’t be effective.
• TSE’s request seems to be an effort obligation. It is good that the substance of the company’s improvement plan, which only made an effort to improve, will be improved.

• Although many institutional investors’ voting criteria apply the rule of “support the proposed appointment of top management director if one female director is nominated,” more in-depth examination should be conducted.
• Agenda based on TSE’s request isn’t easy to understand for all investors, and the current voting guidelines for domestic institutional investors make it unlikely that they will vote for it.
• The ISS ROE criteria will be raised next year, and companies may not raise ROE with bold shareholder returns until the voting guidelines for domestic institutional investors are also raised.

• Most large companies initially estimate sales and profits conservatively, and CapEx, which is often planned more than a year in advance, isn’t often above plan.
• Companies have a cautious earnings outlook, but the market consensus still expects profit growth in FY2024. CapEx growth in the BOJ Tankan is expected to be slightly higher than profits.
• Assuming an 8.5% increase in CapEx for large manufacturing companies and a low single-digit growth in the recurring profit outlook, the level of cash on hand is unlikely to decrease.

• Profit margins boosted by cuts in personnel, R&D, CapEx, and corporate tax rates. Much of the improved free cash flow went onto the balance sheet instead of being invested.
• OP Margin’s sluggish growth indicates that the cost-cutting model is no longer working. Investments are needed to create products with higher gross margins.
• While the limitations of the cost-cutting model can be seen, ROE, which indicates the achievement of the management goal of increasing medium-to-long-term shareholder returns, is sluggish in many companies.