Painting a better SK Kaken

OUR SHAREHOLDER PROPOSAL        Our PRESENTATION        2021 SHAREHOLDER PROPOSAL

Dear fellow shareholders, investors and other market participants,

Asset Value Investors (“AVI”) has submitted shareholder proposals to SK Kaken Co., Ltd. (TYO 4628) (“SK Kaken” or the “Company”) addressing issues contributing to the Company’s poor share price performance, low valuation and potential delisting from the Tokyo Stock Exchange (“TSE”).

Despite a high-quality business model and a dominant share of the domestic construction paint market, SK Kaken trades on an EV/EBIT ratio of less than 0x with net cash covering 103% of its market cap (all as of 30 April 2022). Furthermore, over the last five years, SK Kaken’s share price underperformed the TOPIX Index by -69% and its peers’ by -32% while profits dropped by -9%. With 409 shareholders, SK Kaken only just meets the requirements for listing on the TSE Standard market.

SK Kaken’s issues reflect a lack of urgency and weak management discipline, a symptom often encountered at a company with a controlling shareholder. Approximately 40% of SK Kaken’s shares are owned by, and key senior executive positions are held by, members of the founding family.

The average tenure of the SK Kaken board is 21 years and the Founder has a major influence on the decision-making process. This leads to a culture of intransigence and traditionalism, starving the Company of progress including on environmental concerns that impacts wider stakeholders.

Despite a high-quality business model and a dominant share of the domestic construction paint market, SK Kaken trades on an EV/EBIT ratio of less than 0x with net cash covering 103% of its market cap (all as of 30 April 2022). Furthermore, over the last five years, SK Kaken’s share price has underperformed the TOPIX Index by -69% and its peers’ by -32% while profits have fallen by -9%. With 409 shareholders, SK Kaken only just meets the requirements for listing on the TSE Standard market.

AVI submitted shareholder proposals last year, seeking a 10-for-1 stock split and to cancel 90% of the outstanding treasury shares. Although general shareholders strongly endorsed both our proposals (55% and 57% respectively), it has fallen on deaf ears.

In response to AVI’s proposals, SK Kaken announced a shareholder benefit program in December 2021, a nonsensical attempt to attract more shareholders and retain its TSE listing. For the privilege of holding more than 100 shares, worth Y3,550,000 as of 30 April 2022, shareholders qualify for a voucher card worth Y5,000 – an effective 0.14% return on investment.

AVI has been a large minority shareholder and owner of SK Kaken for five years. Due to a lack of progress and both President and Chairman’s refusal to meet, AVI has submitted shareholder proposals to address six issues aimed at sustainably enhancing SK Kaken’s corporate value and retaining the Company’s TSE listing.

1. A 10-for-1 stock split to reduce the prohibitively high minimum trading lot from ¥3,550,000 (the seventh-highest trading value among TSE-listed companies) to ¥355,000. This should improve liquidity and attract individual shareholders.
2. The cancellation of 90% of the 438,400 shares held in treasury. SK Kaken currently holds 14% of outstanding shares in treasury and has not put forward any plans to use the shares such as M&A or executive compensation.
3. Increase the dividend from Y400 per share to Y800, for a 30% payout ratio. SK Kaken has hoarded earnings on its balance sheet, with cash and cash equivalents accounting for almost 70% of balance sheet assets.
4. Shorten the Board of Directors’ term to one year. Against a background of increased awareness of the need to strengthen corporate governance, there has been a general trend of companies in Japan of reducing director terms from two to one year.
5. Appoint a minimum of two independent directors. SK Kaken’s board of directors is currently only composed of one outside director, despite the Corporate Governance Code stipulating that for a company with a controlling shareholder, in SK Kaken’s case the Family, at least one-third of directors should be independent.
6. Disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions. SK Kaken has not formulated even the most basic sustainability policy. The Corporate Governance Code stipulates that companies should promote positive and proactive responses to sustainability issues.

AVI asks its fellow general shareholders to continue to express their disapproval of management policies under the influence of a controlling shareholder who has neglected the interests of minority shareholders for too long, by voting in favour of the shareholder proposals.

Yours sincerely,

19th May 2021
Joe Bauernfreund
CEO & CIO, Asset Value Investors