*Oasis recommends shareholders vote against the reappointment of Chairman Yasunori Sakurano, Sumitomo Forestry alum Tatsuru Sato, and Nomination Committee ChairShigeru Okada
HONG KONG, May 15, 2024--(BUSINESS WIRE)--Oasis Management Company Ltd. ("Oasis") is the manager to funds that beneficially own over 10% of Japanese construction company Kumagai Gumi Co., Ltd. (1861 JT) ("Kumagai Gumi" or the "Company"). Oasis has adopted the Japan FSA’s "Principles of Responsible Institutional Investors" (a/k/a the Japan Stewardship Code) and in line with those principles, Oasis monitors and engages with its investee companies.
Oasis urges its fellow shareholders to vote FORits shareholder proposal for a dividend of JPY 160 per share and vote AGAINST the reappointment of Chairman Yasunori Sakurano and incumbent directors Tatsuru Sato and Shigeru Okada at the upcoming 2024 AGM.
Vote FOR the Oasis Proposal
Dividend of JPY 160 per share (currently JPY 130)
In Kumagai Gumi’s new medium-term management plan, the Company projects that its ordinary income will double from JPY 15.7 billion in FY2024/03 to JPY 30 billion by FY2027/03. Yet, despite improving profitability, the Company reduced its ROE target from 12% to 10%. This mismatch of increasing ordinary income coupled with a decreasing ROE target indicates that the Company’s management is not planning on improving capital efficiency. In fact, it’s planning on reducing its capital efficiency. With the projected doubling of ordinary income and the current equity ratio, which is on par or better than its peers, the Company should improve its capital efficiency.
Kumagai’s construction competitors have formulated dividend policies based on either high dividend-on-equity (DOE) ratios that allow for stable dividends, or higher payout ratios. For example, Obayashi has set a DOE ratio of 5% and Tokyu Construction has set a 4% DOE ratio. Hazama Ando and Nishimatsu both increased their dividend payout ratios to 70%. This compares to Kumagai Gumi’s current dividend of JPY 130 per share, which is equivalent to a payout ratio of 67% and a DOE of just 3.1%, well below peers.
Oasis strongly recommends that Kumagai Gumi set its dividend at a minimum of JPY 160 per share. Kumagai Gumi should adopt a dividend policy that sets the payout ratio at the higher of a minimum of 50%, or a DOE ratio of at least 4%. This would translate into a dividend of JPY 160 per share, based on book value per share ("BPS") as of FY2024/03 of JPY 4,185 and EPS for FY2024/03 of JPY 192. This amounts to a total dividend payment of approximately JPY 6.9 billion, which is feasible based on JPY 8.3 billion of net profit for FY2024/03 and easily sustainable in the future. Oasis believes that by improving its dividend policy and implementing continuous buybacks, the Company’s share price should well exceed JPY 5,200 per share.
Kumagai Gumi’s reasons for rejecting the Oasis proposal should not be trusted. Kumagai’s Board has opposed Oasis’s proposal to increase the dividend. As for the reason for the opposition, the Company claimed that the equity ratio dropped to 38.5% because of the increased amount of accounts receivable from completed construction contracts. However, the lower equity ratio is caused by an overcapitalized balance sheet and poor capital allocation policies, and the increase in accounts receivable is likely to be temporary. The equity ratio could be easily increased by the sale of Sumitomo Forestry shares and other cross-shareholdings and poor investments, and reduction of debt would push the equity ratio above 45%. Additionally, Kumagai’s 45% equity ratio threshold in its new Medium-term Plan is higher than competitors which target a 35-40% ratio, and higher than what we think is reasonable. Shareholders should not be made to suffer for poor management decisions. Kumagai is using an unnecessarily high equity ratio as an excuse to not raise returns to shareholders.
Paying a JPY160 per share dividend amounts to only an additional JPY1.3 billion, which, if necessary, could be financed through a small reduction in the Company’s investment budget. At the start of the last Medium-term Plan, the Company planned to generate JPY7 billion annually from its investments from FY2023/03. However, it managed to only generate JPY400m in total over three years from FY2021 to FY2023. In its newest Medium-term Plan, the Company now hopes to generate JPY4 billion cumulatively, including for prior investments, from an additional investment of JPY40 billion, which appears highly unrealistic, having only achieved a 2.5% return on its investments in the previous Medium-term Management Plan.
Instead of wasting capital on low return investments, shareholders should demand that Kumagai bolster its shareholder returns by supporting the Oasis proposal. Oasis’s proposed dividend of JPY 160 per share is modest when compared to Kumagai Gumi’s current dividend of JPY 130 per share, its balance sheet, and profitability, and is thus easily achievable.
Vote AGAINST the Company’s Proposal to Reappoint Directors Sakurano, Sato, and Okada
Oasis recommends shareholders vote AGAINST the reappointment of Chairman Yasunori Sakurano, as well as Tatsuru Sato, Special Komon of Sumitomo Forestry, and Shigeru Okada, Chair of the Nomination Committee.
Chairman Sakurano’s tenure as president from April 2018 to March 2024 has been a failure for all Kumagai Gumi stakeholders. During his tenure, Kumagai has:
Failed to hit the targets set in the Medium-term Management Plan (FY2021-2023), with ordinary income achieving just JPY13 billion, compared with the budgeted JPY33 billion.
Fallen well below guidance for the year-ending March 31, 2024, with operating profit and net income coming in 16.8% and 20% below target, respectively.
Decreased ROE from 15.27% in the year prior to Chairman Sakurano’s appointment to just 4.6% this year, the lowest in a decade and well below the 12% ROE forecasted in the prior Medium-term Management Plan.
As disclosed by Kumagai itself, the Company’s investments have destroyed value. In its last Medium-term Management Plan, Kumagai invested JPY17 billion but only generated income of JPY400 million, a return of just 2.4% which is less than half of the Company’s 5.7% cost of capital.
Oasis recommends shareholders vote AGAINST the reappointment of Tatsuru Sato. Sato, formerly a director of Sumitomo Forestry and now a special advisor (Tokubetsu Komon), represents the failed capital alliance with Sumitomo Forestry. The cross-shareholding has benefited Sumitomo Forestry but has provided no tangible benefits to Kumagai and is just a distraction. Oasis does not believe that retaining Sato provides the Company with any benefit:
The capital alliance with Sumitomo Forestry has not generated meaningful synergies and there is no evidence that Kumagai will be able extract synergies in the next Medium-term Plan.
Tatsuru Sato resigned his directorship at Sumitomo Forestry but remains a paid special adviser. This causes substantial conflicts-of-interest, as can be seen from Kumagai investing solely into Sumitomo Forestry’s overseas funds without comparison to other funds.
Sato’s expertise in administrative management is replicated by Koji Hidaka and adds no additional value.
Sato is not even in charge of the relationship with Sumitomo Forestry, which is managed by representative director Koji Okaichi.
Oasis recommends shareholders to vote AGAINST the reappointment of Shigeru Okada, the chairperson of Kumagai’s Nomination Committee, for the following reasons:
Okada has repeatedly approved the renomination of Chairman Sakurano, despite his continued failure to hit targets during his time as president of Kumagai Gumi.
Okada has also approved the renomination of director Sato, who has a clear conflict-of-interest with Sumitomo Forestry and represents the failed capital alliance.
Kumagai Gumi has consistently failed to achieve the targets it has set for itself. There is little evidence that anything has changed at the Company to give shareholders comfort that it will hit the targets in its new Medium-term Plan. Dramatic change is needed at Kumagai and, as a result, we are reaching out to other shareholders to hold Kumagai’s board of directors accountable for consistent operational failures and poor capital allocation.
We urge Kumagai Gumi to embrace accountability by management, equal treatment of all shareholders, and enhanced shareholder returns.
Oasis asks shareholders to vote FOR its shareholder proposal and emphasize the importance of capital efficiency to Kumagai’s management, and vote AGAINST the reappointment of Yasunori Sakurano, Tatsuru Sato and Shigeru Okada, at the Company’s upcoming AGM.
***
Oasis Management Company Ltd. ("Oasis") manages private investment funds focused on opportunities in a wide array of asset classes across countries and sectors. Oasis was founded in 2002 by Seth H. Fischer, who leads the firm as its Chief Investment Officer. More information about Oasis is available at: https://oasiscm.com. Oasis has adopted the Japan FSA’s "Principles of Responsible Institutional Investors" (a/k/a Japan Stewardship Code) and in line with those principles, Oasis monitors and engages with our investee companies.
The information contained in this press release (referred to as the "Document") is an information resource for shareholders in Kumagai Gumi offered by Oasis, the investment manager to funds that are shareholders of Kumagai Gumi (the "Oasis Funds"). The Document is not intended to solicit or seek shareholders' agreements to jointly exercise any voting rights with Oasis. Shareholders that have an agreement to jointly exercise their voting rights are regarded as Joint Holders under the Japanese large shareholding disclosure rules and they must file notification of their aggregate share ownership with the relevant Japanese authority for public disclosure under the Financial Instruments and Exchange Act. Oasis does not intend to be subjected to such notification requirement. The Document exclusively represents the opinions, interpretations, and estimates of Oasis.
