Brief Japan: Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders and more

In this briefing:

1. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
2. Toshiba: King Street Round Two

1. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.

2. Toshiba: King Street Round Two

Yesterday, King Street sent a letter to Toshiba Corp (6502 JP) CEO Nobuaki Kurumatani, applying pressure by threatening to nominate alternative directors to the company’s board. The full contents of the letter can be found here.

King Street’s requirements for the new board are stated as:

Among other things, the new Board must:

(i) ensure management applies rigorous financial discipline to capital allocation decisions, including use of excess cash, determination of optimal capital structure and capital expenditure return requirements;

(ii) drive management to re-examine Toshiba’s business portfolio with a critical eye on competitive position, sector landscape, synergies available and profitable growth prospects;

(iii) direct management to evaluate non-operating and underperforming businesses and assets (while respecting that Toshiba may need to be engaged in certain activities important to Japan’s national security interests);

(iv) ensure that management attains global peer profitability levels at each business segment based on projections supported by robust, bottoms-up analysis; and

(v) instill a culture of accountability and ownership at all levels of the organization.

By and large these demands amount to, “follow the instructions in our previous presentation“. That presentation, while thorough in some respects struck us as being naively optimistic, as we noted in Toshiba: King Street Assumptions Look Exceedingly Optimistic.

Travis Lundy also commented on the presentation in Toshiba: King Street’s Buyback Proposals Lack Required Detail and Toshiba: King Street’s Valuation Analysis Is… Punchy?

Given developments in the intervening time period including a sell-down of about 27% of King Street’s initial stake at a price of ¥3,925 (some 64% below the “well over ¥11,000” per share they feel Toshiba is worth) according to Bloomberg, and a downward revision to OP guidance from ¥60bn to ¥20bn, we feel that there is little reason to change our assessment.