In this briefing:
- Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
- Aruhi Placement – Bigger than the IPO but Good Track Record and Price Performance Should Help
- FANCL: Playing the Long Game
- Pepper Food Services 4QFY2018 Results: Burnt, But a Lesson Learnt
- Musashino Bank (8336 JP): Braking Bad
1. Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
When the Tender Offer / MBO for Kosaido Co Ltd (7868 JP) was announced last month, my first reaction was that this was wrong. It was couched as being management-supportive, had one large independent shareholder agreeing to tender, and the it was touted as an effort to improve the printing and other “info” businesses such as staffing, and similar.
There was no mention of the fact that 94+% of the profits the last few years came from a majority stake in an external company which conducted funeral rites and services across a well-known chain of six large funeral parlours in Tokyo. Neither that company’s name nor the business segment it operates in were mentioned in the document (Japanese only) announcing the intention to conduct the MBO and if you look on the Kosaido website, you have to dig somewhat deeply to figure out that it is even a thing. In the company’s quarterly statements and semi-annual presentations of earnings, there is one line with revenues. One has to go into the fine print of the yukashoken hokokusho to discover more, and if one does, one sees that it is the profitable funeral parlour business which is effectively being purchased at 0.5x book and the rest of the company is being purchased at 1x book.
I published my original opinion in Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? suggesting that the only way this was likely to not get done is if some brave activist came forward. I concluded…
This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.
This company is an example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.
It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A.”
It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, I expect this gets done.
If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.
Shortly afterwards, an activist did come forward. Long-time Japan activist Yoshiaki Murakami bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. I thought the stock had run too far at that point (¥775/share). While still cheap, I did not expect Bain to lift its price by 30+% and I did not expect a white knight to arrive quickly enough. This was discussed in Kosaido: Activism Drives Price 30+% Through Terms.
The New News
In the wee hours of Monday 18 February, with 11 days left to the Tender Offer, toyokeizai.net published an article (partially paywalled) suggesting that the longstanding external auditor Mr. Nakatsuji and lead shareholder Sakurai Mie (descendent of the founder of Kosaido, who originally founded a company called 桜井謄写堂 (Sakurai Transcription) in 1949, which later became Sakurai Kosaido, then just Kosaido) were against the takeover.
THAT is interesting. And the backstory here is even more interesting.
2. Aruhi Placement – Bigger than the IPO but Good Track Record and Price Performance Should Help
Carlyle, along with SBI, plans to sell the rest of its stake in Aruhi Corp (7198 JP) for around US$280m.
Aruhi listed in Dec 2017, when Carlyle sold 18m shares. This is the second and final tranche of shares owned by Carlyle. The total sale accounts for 41% of the company’s outstanding shares making it a relatively large deal to digest.
However, the shares have done well since listing and the stock scores well on our framework. Valuations appear reasonable, if the company is able to achieve its mid-term targets.
3. FANCL: Playing the Long Game
- The declining and ageing population in Japan has been a major cause for concern to many Japanese companies.
- Fancl Corp (4921 JP), is a relatively small player in the Japanese cosmetics and nutritional supplements space who is expected to benefit from the declining and ageing population.
- Compared to the peer average, EV/Sales discount narrowed down significantly over the course of the last year. But we believe the discount remains the same on a growth adjusted basis.
- Still too small for institutional investors to notice. But we expect them to start noticing the company over the coming years.
- One of the cheapest stocks on a long term forward multiple, as we expect FANCL to sustain its high growth over a long period of time.
We are not sure if Fancl Corp (4921 JP) can ever be in the same league as Shiseido or Kao, but we certainly believe the company doesn’t deserve to be about 10% of the size of Shiseido. Thus, we have a very long-term bullish view on FANCL and expect to see the company’s market cap to double over the next 5-7 years
4. Pepper Food Services 4QFY2018 Results: Burnt, But a Lesson Learnt
On Thursday the 14th Feb 2019, Pepper Food Service (3053 JP) announced its results for FY2018 and the guidance for both 1HFY2019 and FY2019. The company managed to grow its revenue by an impressive 75.3% YoY outperforming its own estimate by 6.4%.
However, the gross profit only grew by 69.9% during the year as the gross margin slipped 137bps in FY2018 driven by higher energy prices and wages. Higher wages were due to active recruitment of foreign workers within the food service industry which created a supply shortage. To tackle increasing costs, towards the end of the year, Ikinari Steak restaurants increased the prices of its steak. We believe the margin recovery witnessed in 4Q2018 was a direct result of this price increase.
Gross Margin Showing Signs of Recovery
Pepper Food Services saw its EBIT margin decline by 20bps to 6.1% in FY2018, as revenue growth offset most of the gross margin drop through gains from operating leverage. However, its restaurants in New York City continued to underperform. The company expected those restaurants to turn a corner and start contributing to the overall EBIT from FY2018, however, those restaurants failed miserably and continued to drag the overall EBIT margin down. Hence, the company failed to meet its EBIT margin forecast with EBIT falling 4.6% short of company guidance.
5. Musashino Bank (8336 JP): Braking Bad
Musashino Bank (8336 JP) was one of the last regional banks to announce 3Q FY3/2019 results, and they were a nasty surprise: a consolidated net loss for the nine months to 31 December 2018, caused by heavy reserving in Q3 (October-December 2018) against the bank’s exposure to the troubled Akebono Brake Industry Co (7238 JP) . While the bank has slashed its full-year net profit guidance from ¥11.1 billion to ¥4.5 billion, this would still require an heroic level of profits in Q4 which the bank has never before achieved. The share price has fallen over 31% in the last twelve months. Valuations at current levels are still high (FY3/2019 PER is 17.6x) and we consider the share price to be vulnerable to further weakness. Caveat emptor (May the buyer beware) !
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