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Tender Offer at +51% Premium

In a strong start to June for AJOT, NC Holdings was the recipient of a tender offer bid at a +51% premium to the undisturbed share price. As a result, NC Holdings added 109bps to portfolio performance over the quarter. NC Holdings currently accounts for 5.0% of AJOT’s NAV, making it the 8 th largest position in the portfolio.

AVI has been a shareholder in NCHD since June 2021. As the second largest shareholder (behind Miri capital who owned 26.2%) owning over 20% of the votes across AVI funds, we engaged extensively with the Board, both privately and publicly, on ways to enhance corporate value and returns to shareholders. This included our public campaign and subsequent shareholder proposals at the June 2023 AGM. Three of AVI’s proposals successfully passed, including one that required a special resolution. More information on AVI’s 2023 public campaign regarding the shareholder proposals can be found here: (www.enhancingNCHD.com).

It’s a pleasing and successful end to the 3-year investment, that will have seen AJOT generate an IRR of +19% and an ROI of +47%.

NC Holdings (NCHD) share price fell -17%, during a period without significant news. The market is looking for direction from NCHD’s largest shareholders, AVI included. Unfortunately, while we achieved majority support on six shareholder proposals at last year’s AGM, three crucial proposals were not passed. Management’s apparent lack of urgency in improving the business and addressing shareholder concerns has left the company rudderless and investors without a reason to own the shares. This complacency was highlighted when NCHD’s management failed to respond to the TSE’s request to disclose initiatives towards cost-of-capital conscious management. Since the AGM last June, NC Holdings’ share price has fallen -30%, a significant underperformance relative to the MSCI Japan Small Cap Index (+9%).

Now trading on an EV/EBIT of 3.9x and with net cash and investment securities covering 76% of the market cap, we see significant upside. Ultimately, shareholders are aligned in wanting to see a higher share price, and we don’t think the status quo will continue. Although becoming less common as investors gain a better understanding of Japan’s concert party rules, there are still instances where other investors are hesitant to engage in dialogue regarding common holdings. This is a great shame, and an impediment to driving Company reform through the type of collaborative engagement that regulators have been encouraging. We are hopeful that the FSA’s report on the “Tender Offer Rule and Large Shareholding Reporting Rule,” released on 25th December 2023, will help to alleviate market participants’ concerns. The report reiterates that currently shareholders who collaboratively engage are not classed as joint holders unless there is an agreement in place to vote together. They propose further clarification to explicitly exclude institutional investors from the scope of joint holding rule if there is no agreement to make material proposals (change in corporate control) or continuously vote together.

NC Holdings (NCHD) (6236) share price drifted steadily lower over the quarter on lacklustre earnings and news that NCHD’s subsidiary, Nippon Conveyor, along with seven other mechanical car park manufacturers are being investigated on suspicion of violating the antimonopoly act. The share price ended the period down -26% taking 155bps from performance and making it the largest detractor.

While we have no view on the likely outcome of the investigation, it is yet another indicator of NCHD’s poor corporate governance. We have raised numerous concerns over NCHD’s corporate governance, voting to remove all outside incumbent directors at the last AGM and seeking to install two highly experienced directors with capital markets experience. The Board’s decision to fight our eight shareholder proposals when six achieved majority support from shareholders showcases their disregard for shareholders. We hope the continued weak share price, poor operating performance and collusion investigation will highlight to other shareholders that NCHD needs a fresh slate of outside directors with relevant experience to increase NCHD’s corporate value.

During our recent trip to Tokyo, we further conveyed to the President that NCHD needs to release a mid-term plan that would allow investors to better appreciate NCHD’s prospects. Despite management’s hostile approach at the AGM, the meeting was cordial, and the President was receptive to our suggestions, acknowledging the high support for our shareholder proposals. We want NCHD to thrive, and with the right strategy and board experience we believe it will. With the weak share price, we see significant upside.

NC Holdings (NCHD) share price drifted -13% lower over the month following lacklustre results (although given the nature of NCHD’s business, it is difficult to read too much into quarterly performance) and a lack of direction from the Company post the AGM. As a reminder, we had three shareholder proposals successfully passed at NCHD’s AGM held in June, with a further three proposals receiving majority shareholder support.

Management is not doing enough to address the Company’s undervaluation and weak share price. We have been encouraging the company to release a mid-term plan to allow investors to better appreciate the prospects for the company, which we conveyed to the President during our recent trip to Tokyo. Despite management’s hostile approach at the AGM, the meeting was cordial, and the President was receptive to our suggestions, acknowledging the high support for our shareholder proposals. With the weak share price, we see further upside to our target price and are exploring next steps

In a first for AVI, we successfully passed three shareholder proposals at NC Holdings’ (NCHD) AGM held at the end of June, with a further three receiving majority shareholder support. We passed two dividend-related resolutions increasing the dividend to a 70% pay-out ratio and the formation of a stock-compensation plan tied to achieving a three-year total share price return of over 50% and an average three-year ROIC of over 10%.

The three proposals which achieved majority support were to increase the maximum number of directors on the Board from 12 to 13, setting minimum requirements to adopt or trigger a position pill and requiring prior approval from shareholders for a third-party allocation of shares.

One of the resolutions that passed for the dividend was a special resolution that required over two-thirds of the vote. We believe that is one of only a handful of shareholder-proposed special resolutions to have ever passed in Japan. Furthermore, AVI is one of only three shareholders who had their resolutions successfully passed despite opposition by the company this June AGM season.

While we are pleased with the success, we are disappointed that our shareholder proposals to appoint two highly qualified outside directors did not pass. Aside from largely ignoring shareholder views for the past two years, the Board opposed six resolutions that achieved majority shareholder support, engaged in intimidation and baseless threats relating to acting-in-concert issues, mentioned our employees by name in both their public and private rebuttals, and even tried, unsuccessfully, to claim that NCHD’s business was of national interest to avoid scrutiny at the AGM. Despite that, few other shareholders voted against the Board. We are disappointed that other large shareholders did not take issue with this behaviour, almost unanimously supporting all directors and not seeing the value of bringing fresh perspectives to the Board.

We are grateful to both outside director candidates we nominated to the Board, who would have brought a wealth of relevant experience, and who were both truly excited to contribute to Board discussions and improve NCHD’s corporate value. Unfortunately, as things stand, the company is being overseen by a Board with no capital markets experience, who opposed shareholder-friendly resolutions and who have allowed the share price to continue to trade at a discount to its fair value. While we hope to be wrong, we are sceptical that the current Board will find enlightenment over the next year, and, without further shareholder action, suspect we will be in the same position next AGM. We will continue to engage with management and seek ways to improve NCHD’s corporate value. We hope that other shareholders will support our efforts and recognise that the Board is not serving their best interests.

NC Holdings’ (NCHD) share price rallied +18% over the month, adding 85bps to performance, gaining once the news broke on 2^nd May that we had submitted shareholder proposals to the June AGM. As detailed on our website www.enhancingNCHD.com, we submitted eight shareholder proposals covering a variety of topics, including the election of two independent outside directors, the establishment of a strategic review committee, an increase in stock compensation for directors, and a dividend equivalent to a 70% pay-out ratio.

We have been seeking ways to bring NCHD’s value closer to its intrinsic value through friendly and constructive dialogue in private with management for two years. It is disappointing, therefore, that management have not listened to our recommendations and since submitting our shareholder proposals have embarked on a campaign of hostility and self-protection. The Board have made little attempt to understand the benefits of our shareholder proposals, making baseless claims that AVI is planning to sell off the conveyor belt business and that we are seeking control of the Company so that it conforms to our wishes.

Despite seeking constructive dialogue to further explain our views, the Company is now refusing to meet with us. Of the ten companies to which we have submitted shareholder proposals to date, we have never before experienced a management team behave so unprofessionally. Management’s refusal to engage with its second largest shareholder (with more than 20% of the votes) highlights their appalling attitude towards shareholders and raises further concerns over their stewardship.

To any observer of our presentation and shareholder proposals, it is obvious that we are not seeking to control the Company and that our shareholder proposals will benefit all shareholders. We are disappointed and bemused that NCHD has chosen the path of confrontation, even opposing our proposal that seeks to increase director compensation. We would have been more than willing to withdraw our shareholder proposals and continue our dialogue in private if the Board had listened to our concerns. It is only proxy and legal advisors who stand to benefit from confrontation, with their fee revenue growing with protracted and acrimonious shareholder conflicts. We sincerely hope that NCHD’s Board of Directors is not wasting shareholder funds on such advisors like it has done in the past.

We hope that NCHD’s shareholders will look past management’s misleading and superficial rhetoric to see that our interests are aligned with all shareholders in seeking to maximise the Company’s corporate value. If any shareholders would like to discuss our shareholder proposals in more detail, please do get in touch via our website.

NC Holdings (NCHD), a top ten position, is nearing its two-year anniversary in the portfolio. Since we made the first purchase at Y1,039, the share price has leapt 94% to Y2,015, where it has unfortunately, languished for the past year.

NCHD holds a collection of businesses including solar panel consulting, conveyor belts and – the most attractive – car parking systems. Collectively they trade on a forward EV/EBIT multiple of 8.5x with net cash and securities covering 42% of the market cap. We think the fair value is approximately +30% higher than the prevailing share price.

There are a few reasons for the undervaluation; an inefficient balance sheet, poor shareholder communications, and a conglomerate structure. With limited synergies, there is no rationale for holding such a disparate collection of businesses, and we see all the issues leading to NCHD’s lowly valuation as fixable. Unfortunately, despite sending a 60-slide presentation last year, management have been slow to act. Over the quarter they disclosed a disappointing dividend increase from Y15 to Y17, for an inadequate 18% pay-out ratio.

Across AVI funds we hold 22% of NCHD’s shares and a US-based fund holds 27%. While, we have tried to engage constructively in private we fear that our suggestions are falling on deaf ears and that some members of the Board are resistant to change.  While nothing is decided, and we need to carefully consider the right structure, with such a large shareholding we have the option to submit shareholder proposals at the upcoming June AGM.

Taking our suggestions and concerns public is always a last resort, and we’d rather hold discussions in private. However, our strategy is to try and maximise the value of the companies we invest in and if NCHD’s management are not acting in the best interests of shareholders, then they should be held accountable.

NCHD has some good business lines, and it is such a shame they are being undermanaged. We aren’t convinced that NCHD’s conglomerate and capital structure are appropriate and we are supportive of the Board exploring all options to maximise shareholder value.

NC Holdings (NCHD) detracted a modest 37bps from performance, with a -1.9% share price return that failed to keep up with rising markets. Results were weak, recording a small loss in the last quarter, but this was a timing effect from a late recognition of sales and management are still confident in achieving annual forecasts. As we discussed earlier, we hold a 22% stake and will be exploring options to maximise NCHD full value.

We started investing in NC Holdings (NCHD) in June 2021 following an acrimonious public dispute between NCHD and its then largest shareholder TCS. NCHD holds a collection of businesses including solar panel consulting, conveyor belts and – the most attractive – car parking systems. Collectively they trade on an EV/EBIT multiple of just 5.4x with net cash and securities covering 49% of the market cap. After TCS failed to replace NCHD’s board, NCHD repurchased their shares (c.32% of outstanding) at Y900, a hugely accretive acquisition with the shares now trading at Y1,980.

With growing confidence in the quality of NCHD’s business, the presence of a US-based investor on the shareholder register and compelling valuation, we have been slowly increasing our position. Over the quarter we purchased 15% more of the company and year-to-date have almost doubled our ownership. At the end of the quarter, we owned 19% of the Company. We note the US investor has also been increasing their ownership and now holds 23% of NCHD’s shares.

Our engagement agenda has covered a wide variety of topics, from reviewing NCHD’s conglomerate structure to improving corporate governance, and has more recently focused on proposing a 100% total return pay-out ratio and cancelling the almost 9% of shares held in treasury. NCHD does not disclose a policy on shareholder returns and, excluding the repurchase of shares from TCS, has only paid out about 20% of its net income over the past three years. A 100% dividend pay-out ratio on next year’s earnings would amount to a respectable 4.5% dividend yield and cancelling the 9% of shares held in treasury would be a simple and effective means of allowing investors to treat those shares as no longer outstanding and removes any risk of a reissuance.

Over the quarter we had a fruitful meeting in Tokyo with the President and other board members, and plan to continue our engagement efforts ahead of next year’s AGM. We believe if management act on all our suggestions, then the share price would be able to reach our target price of Y2,700 – Y3,000, or 36% – 52% higher.

The largest detractor, taking 68bps from performance, with a share price decline of -14%, was NC Holdings. The decline was not fundamentally driven, with the Company reporting respectable first-quarter earnings. We took advantage of the weakness and added to our position, and at the time of writing, own a 19% stake in the business.

The second-largest contributor was NC Holdings, whose +21% share price increase added 57bps to performance. NC Holdings owns a disparate collection of businesses across conveyor belts, multistorey car parks and renewable energy. Amongst other suggestions, reorganising the businesses segments is a topic that we have been engaging with management on, seeing the most value in the multistorey car park segment. We have an interesting dynamic at NC Holdings, with AVI funds owning 14% of the voting rights and a similarly minded US fund owning almost 20%. There are no allegiant shareholders blindly supporting management, allowing for a healthy relationship where the Board are compelled to listen to shareholder views. We hope to see this dynamic bearing fruit later in the year, and we have been modestly adding to the position.

The second-largest contributor was NC Holding, whose +23.9% share price increase added 74bps to performance. NC Holding owns a disparate collection of businesses across conveyor belts, multistorey car parks and renewable energy. Amongst other suggestions, reorganising the businesses segments is a topic that we have been engaging with management on, seeing the most value in the multistorey car park segment. We have an interesting dynamic at NC Holdings, with AVI funds owning 13% of the voting rights and a similarly minded US fund owning almost 20%. There are no allegiant shareholders blindly supporting management, thus allowing for a healthy relationship where the Board are compelled to listen to shareholder views. We hope to see this dynamic bearing fruit later in the year, and we have been modestly adding to the position.