Painting a better SK Kaken: 2021 Shareholder Proposals

• Our letter
• Our Shareholder Proposal

SK Kaken limited the length of the reasonings for shareholder proposals to 400 characters so a shortened version was resubmitted to the AGM. We have uploaded the full reasonings to this website to allow shareholders to make a more informed decision.

Dear Fellow shareholders, investors and other market participants,

Asset Value Investors (“AVI”) announced today that it has submitted shareholder proposals to SK Kaken Co., Ltd. (TYO 4628) to address, at no cost to the Company, some of the factors contributing to the company’s poor share performance and low valuation.

Since it became a shareholder in 2017, AVI has offered numerous constructive suggestions to SK Kaken on concrete actions that it can take to improve its underlying operating and financial performance. The SK Kaken board, controlled by the Fuji family, have shown little interest in any of these suggestions.

Over the last 12 months SK Kaken’s share price has underperformed against the TOPIX Index and its peer group of paint and coatings companies by -31% and -33%, respectively. SK Kaken now trades on an EV/EBIT ratio of less than 1x, a price-to-book ratio of 0.9x with net cash covering 93% of its market cap.

There are multiple causes for SK Kaken’s underperformance and undervaluation. Chief among these are poor operating results reflected in low profit growth, inefficient capital allocation, lack of board diversity and independence, woeful shareholder communication, excess treasury shares and a prohibitively high minimum trading lot size. In comparison to more aggressive and dynamic competitors in the industry, SK Kaken is falling behind.

These issues reflect a lack of urgency and weak management discipline, a symptom of 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 Fujii family.

With this as background, AVI has submitted shareholder proposals to call to the attention of fellow shareholders the company’s stubborn resistance to even the most reasonable proposals.

AVI’s proposals are modest and should be uncontroversial. They address two technical causes for SK Kaken’s low stock price that can be resolved at no cost.

The first is a 10-for-1 stock split to reduce the prohibitively high minimum trading lot from approximately ¥4,000,000 (the sixth highest trading value among TSE-listed companies) to ¥400,000.  This will create greater liquidity and open the company to investment by retail investors who are now effectively excluded.

The second is to cancel 90% of its treasury shares. 14% of outstanding shares are held in treasury, shares that have no business purpose such as possible future M&A or to fund an executive incentive stock plan – SK Kaken has no M&A plans or a stock-based compensation scheme – and serve only to depress the stock price.

These modest and costless proposals to enhance liquidity and SK Kaken’s stock price have been rejected outright by management as have all other proposals offered to date by AVI. AVI are not the only shareholder disappointed with the Company’s treatment of minority shareholders, with only 76% of shareholders supporting the re-election of SK Kaken’s Chairman in 2020, compared to 93% in 2016.

AVI calls on its fellow shareholders to continue to register 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 AVI’s proposals.

We have launched this website to provide information regarding SK Kaken’s neglect of shareholders and welcome dialogue with any stakeholder who would like to discuss our shareholder proposals further.

Yours sincerely,

20^th May 2021
Joe Bauernfreund
CEO & CIO