Newsletters - Asset Value Investors

AJOT

Takuma • May 2024

51% premium takeover bid

Shortly after month end, NC Holdings (“NCHD”) received a tender offer bid aimed at privatising the company from an affiliated company of US-based Miri Capital. Prior to the announcement, we had been negotiating with Miri Capital on the tender agreement, and we agreed to tender our 19.3% stake held by AJOT

The investment in NCHD accounted for 3.6% of AJOT’s NAV at month-end and the tender offer price of Y2,208 per share represents a +51% premium to the undisturbed closing price at the end of May. This will add 185bps to AJOT’s June NAV, assuming the tender completes, which given our undertaking we suspect it will.

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 voting rights of NCHD, we have 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 +22% and an ROI of +47%.

AJOT

Takuma • May 2024

Following a six-month period that saw Takuma’s share price rise by +29%, the market was left disappointed by Takuma’s underwhelming midterm plan (MTP) announced during the month, with the share price declining by -12.0% in the subsequent day of trading.

Positively, the MTP demonstrated improved transparency around quantitative targets (such as orders intake and ROE targets), and, for the first time, disclosed a shareholder returns policy. This included a 50% payout policy, 4.0% Dividend on Equity target and the intention to buyback 3.8% of shares outstanding this year, with a similar amount during the following two years . However, the profit guidance for the next three years left much to desired, with next year’s operating profit conservative guidance (Y11.2bn) falling well short of consensus (Y13.4bn).

While we acknowledge that Takuma implemented some of our suggestions, management chose to ignore several of our most important points, such as the unwinding of cross-shareholdings and the divestment of non-core business segments. Having so far achieved an ROI of +21% and an IRR of +24% in our just over one year holding period, we will continue engaging with management on methods to enhance capital policy and improve operating efficiency. We see a further +68% upside, with Takuma’s 7.1% weight in AJOT reflective of our conviction.

AJOT

Takuma • Q3 2023

Takuma (6013), a newcomer to the portfolio earlier in the year, was the strongest performer with a +6.5% share price return adding 44bps to performance. Takuma builds waste treatment plants for local municipalities in Japan, and with a tight labour market there is a trend of outsourcing the operation of these plants to the constructor on decade long contracts. This trend underpins our investment thesis for Takuma, with the business gradually shifting towards recurring maintenance and operation contracts, which we do not believe is recognised in Takuma’s 3.8x EV/EBIT multiple. Given relatively high liquidity, we were able to build a sizeable investment in Takuma, with an 8.2% weight making it the 3^rd largest position in the portfolio. CLSA summed up Takuma’s potential in an excellent note over the quarter, which we suspect bolstered the shares. Entitled “Recurring Dream”, the author highlighted that Takuma has built 120 waste-treatment facilities in Japan, 60% of which already have operating contracts, leaving room for further upside as the remaining 40% convert. We’ve built a 2% stake in the Company and have sent a presentation with a variety of measures that we’d like to be included in their mid-term plan next year.

AJOT

Takuma • July 2023

Takuma, which entered the portfolio in April, saw its share price increase +5% over the month, adding 45bps to performance. Takuma builds waste treatment plants for municipalities in Japan, and with a labour shortage there is increasing demand for companies to operate these plants after construction. Our strong conviction lies in Takuma’s shifting business model, towards recurring maintenance and operation contracts, which we don’t think is reflected in Takuma’s 3.9x EV/EBIT multiple at present. Given relatively high liquidity, we were quickly able to build a sizeable investment in Takuma with an 8.1% weight making it the 4^th largest position in the portfolio.

CLSA summed up Takuma’s potential in an excellent note, which we suspect bolstered the shares over the month. Entitled “Recurring Dream”, the author highlighted that Takuma has built 120 waste-treatment facilities in Japan, 60% of which already have operating contracts, leaving further room for expansion over the coming years. We’ve built a 2% stake in the Company and plan to engage with management on ways to address the undervaluation.

AJOT

Takuma • Q2 2023

Takuma, a waste treatment plant builder and operator, finally entered the portfolio after being on our watchlist for several years. We watched the share price boom +150% higher on an ESG-fuelled bubble in 2021, only to fall -46% to where we started buying. For a business with an open shareholder register (32% foreign ownership), a structural tailwind, and a shifting business model to more recurring maintenance work (already 50%); we think Takuma’s lowly 3.5x EV/EBIT valuation multiple is wholly unjustified.

Takuma’s share price has been subdued following its results announcement, which has allowed us to build a sizeable 7% of NAV position in the portfolio. Next year’s lacklustre profit guidance of -18%, on +2% sales, paints a less rosy picture than reality. Not only is it a difficult comparison period, with last year’s profits growing +39%, but over half of the profit decline is due to increased R&D and depreciation expenses, with a more aggressive investment approach from management.

Our thesis on Takuma is predicated on its shifting business model to more recurring revenue streams, and while we attribute no value to the Company’s investment in carbon capture and energy trading, we think there is potential to achieve growth in these areas. We like that management are on track to achieve their profit target of Y20bn by 2030 (8.5% CAGR), but we believe management can further enhance value with a more aggressive approach to shareholder returns. Almost half of Takuma’s balance sheet assets are held in cash and listed securities, accounting for just over 60% of the market cap. We plan to start engaging with management on solutions to increase the lowly valuation.