Shareholder activism in Japan is on the rise. Japan registered the second-highest number of activist events in 2022, surpassed only by US equities.
Prominent examples of shareholders’ successful engagement with management include Toshiba, which is on the path to privatisation, and Fujitec, which recently saw a majority of its outside directors removed after a shareholder vote.
Japan is a particularly attractive market owing to its abundance of high-quality, undervalued companies. Our team typically focuses on small-cap companies, where we can amass larger stakes and work collaboratively with management to address underperformance.
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An auspicious shift upmarket
With 95% of TSI Holdings’ (Tokyo: 3608) market value consisting of net cash and investment securities, and an estimated additional 29% in surplus real estate, the clothing manufacturer is clearly undervalued. While for many years it has been a value trap – the share price has languished since 2011 – recently there have been some positive changes.
The company has shifted its focus to higher-quality niche street and athleisure brands, the former chairman of the founding family has stepped down, and there is an increasing presence of institutional shareholders on its register. We have built a 5% stake in the company and, based on a conservative valuation, we estimate that there is scope for a 79% rise in the share price.
Making money in medicine
Nihon Kohden (Tokyo: 6849), or NK, is a medical equipment manufacturer worth £1.8bn with a diversified product line-up across patient monitoring, defibrillators, and ventilators.
It has a proven record of growth, with sales recording a 20-year compound annual growth rate (CAGR) of 5%; they declined in only three of the past 37 years. Despite its impressive performance, it trades on an enterprise value to earnings before interest and taxes (EV/EBIT) multiple of just 11, compared with its peers’ 17.
We believe NK can grow its market share in the US from the current 10% to 15% and raise operating margins from 9% to 15% in four years. Under that scenario, combined with a narrowing discount to its rivals, we think the share price could more than triple. In the meantime, we are exposed to a growing, world-class medical-equipment firm.
Cash in on e-commerce
Locondo (Tokyo: 3558) runs a fashion e-commerce platform in Japan, which was launched to provide shoe manufacturers with a venue to sell online. Importantly, it does not own the inventory of each brand – it simply matches buyers and sellers, then manages the delivery. Locondo has exciting growth potential.
Japan’s fashion e-commerce penetration is currently a mere 19%, but it is expected to grow to 41% by 2030.
Locondo is aiming to have a 3% market share by 2030, which implies that sales will reach a compound annual growth rate of 19% over the next nine years.
After a 73% decline in the share price from its peak in September 2020, Locondo trades on an EV/EBIT multiple of just 8.3. The share price does not reflect Locondo’s intrinsic value.
As Locondo’s largest shareholder, we will be working with management on ways to rectify the undervaluation.
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