Taking NS Solutions to the next level

Our letter         Our Shareholder Proposal

Dear Fellow shareholders, investors and other market participants,

Asset Value Investors (“AVI”) today publicly released a letter to NS Solutions Corp (TYO 2327) (“NSSOL”) responding to NSSOL’s rejection of AVI’s shareholder proposals which were submitted in April.

AVI has proposed:

1. a final-year dividend of ¥62 per share, for a total dividend of ¥87, in reaction to NSSOL’s proposal to reduce the dividend from ¥65 last year to ¥52.5 this year, the first dividend decline since 2009;
2. a share buyback, to be funded by disposition of excessive “strategic shares”, to reduce the share ratio of NSSOL’s controlling 63.4% shareholder Nippon Steel Corporation to 61.1%, a level that will help to meet the Tokyo Stock Exchange’s new 35% free float requirement; and
3. the introduction of stock-based compensation for directors.

While, AVI is pleased that NSSOL has taken on board its suggestions to introduce a mid-term plan and change its board structure to one with an audit committee, it is disappointed that NSSOL has rejected AVI’s modest shareholder proposals.

NSSOL justifies reducing the dividend from ¥65 last year to ¥52.5 this year with vague and unquantified references to the need for “internal reserves” and investment in DX. A closer look at numbers, however, reveals that AVI’s proposed dividend is only ¥3.2 billion higher in the aggregate than NSSOL’s own proposed dividend, in the context of a company that has approximately ¥145 billion in surplus cash and investment securities assets.

NSSOL’s justifications for not disposing of excess “strategic shares”, including a stake in Recruit Holdings accounting for 20% of total assets, are similarly vague and unquantified. The total value of the share buyback proposed by AVI is ¥20 billion, compared again with ¥145 billion in surplus cash and investment securities assets. At the same time NSSOL has yet to explain how it intends to reduce the share ownership percentage of Nippon Steel to maintain a free float ratio that will allow NSSOL to remain in the TSE’s Prime Market.

AVI has proposed stock compensation for senior executives in order to create incentives for medium to long term growth in corporate value in tracking the time horizon of the Mid-Term Business Strategy.  While the Company vaguely stated that it is “considering” introducing the type of mid- to long-term incentive that AVI is proposing sometime in the future, NSSOL offers no objective reason why it should not be adopted sooner rather than later.

NSSOL’s failure to quantify key performance and financial indicators conspicuously stands out in its discussion of planned investment of DX. While implying that planned future investment in DX precludes payment of a higher dividend, a closer look at NSSOL’s Mid-Term Business Strategy reveals that NSSOL plans to spend ¥2 – 3 billion per year on DX investment, only about 1% of annual revenues.

AVI believes that NSSOL should instead invest up to ¥50 billion in DX over the next five years.  NSSOL has ample cash reserves to fund this level of investment while also paying the dividend and executing the share buyback AVI is proposing.

NSSOL’s failure to analyze key performance and financial parameters with greater precision and discipline, AVI believes, could be a symptom of a management culture under the influence of a dominant shareholder whose interests are not aligned with those of minority shareholders. AVI appreciates the open and constructive dialogue it has had with the Company, which we hope to continue in the future. AVI’s encourages shareholders who see merit in its modest shareholder proposals to vote in support.

Yours sincerely,

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