Taking NS Solutions to the next level

Asset Value Investors (“AVI”) today launched a public campaign surrounding the submission of shareholder proposals to NS Solutions (TYO 2327, “NSSOL”), a subsidiary of Nippon Steel Corporation (TYO 5401, “Nippon Steel”).

Due to the parent-subsidiary listing relationship between NSSOL and Nippon Steel, the standards of governance and treatment of minority shareholders expected of a Prime Market listed company have not been achieved. Two former Nippon Steel executives with no experience in the IT services industry have been appointed as internal directors of NSSOL in the last two years, NSSOL has deposited 90.2 billion yen of cash with its parent company Nippon Steel at an interest rate of about 0.2%, NSSOL holds 67.8 billion yen in shares of its clients, mainly Recruit HD, there is potential ignoring of employee welfare issues and the parent company holds a prohibitively high 63.4% of the shares preventing NSSOL from conducting share buybacks from general shareholders as a further reduction in the free float could violate the criteria for prime listing.

Against this backdrop, NSSOL trades at a significant undervaluation to its fair enterprise value. Specifically, the company’s EV/LTM EBIT is 6.8x after factoring in the after-tax value of investment securities, which is close to half the average 13.3x for competitors in the industry. Despite the low valuation and deteriorating capital efficiency, the current Board of Directors have taken little action to address AVI’s concerns, failing to maximise corporate value for shareholders.

Considering this situation, AVI, as a leading minority investor with a fiduciary duty to hold the companies in which it invests to the highest standards, suggests the following four urgent measures to the Board of Directors of NSSOL.

Measures to be implemented immediately to improve employee welfare, governance and capital efficiency:

1. Promptly initiate discussions with the parent company to reduce the parent company’s percentage of voting rights to about 60% through a share buy-back of 7,834,000 shares from the parent company Nippon Steel via a discounted TOB or other arrangements within one year from the conclusion of the 42^nd Ordinary General Meeting of Shareholders in June 2022.
2. Establish a policy to reduce strategic shareholdings, and unless due to unavoidable circumstances, sell or dispose of all strategic shareholding at fair value by 1^st March 2023.
3. Establish a policy not to make deposits to the parent company, its subsidiary, or affiliated companies, and to immediately recover the current deposits.
4. Establish a special investigative committee (“Special Investigation Committee”) for the purpose of investigating compliance-related matters such as sexual harassment and power harassment at the Company. The Special Investigation Committee shall be composed of members qualified as lawyers who are independent from both the Company and the Directors of the Company. The Special Investigation Committee must disclose the results of its investigation by way of a report, including remedial measures by 1^st September 2022.

Despite regular private dialogue, the Board of Directors of NSSOL have ignored AVI’s recommendations and failed to put forward remedial solutions.

NS Solutions must take steps to achieve the highest standards of corporate governance and capital discipline that a Prime Market publicly traded company should uphold, and to address its undervaluation.

As the controlling shareholder, Nippon Steel has an obligation to ensure that NS Solutions is managed for the benefit of all stakeholders. Nippon Steel has the power to hold NSSOL’s board to account and call on NSSOL to address poor employee welfare and its discounted valuation.

AVI encourages shareholders who see merit in its modest shareholder proposals to vote in support.

Yours sincerely,

16^th May 2022
Joe Bauernfreund
CEO & CIO, Asset Value Investors