Managements lack in the sense of cost of capital and leave the cheap valuation | 極東貿易への株主提案に関する特集サイト
極東貿易
If our proposals are approved and Kyokuto continues 100% payout ratio, the estimated share price is;
>JPY 4,000(*)
*Calculation based on dividend yield. Please find the detail of calculation in “our shareholder proposals”.

Managements lack in the sense of cost of capital and leave the cheap valuation

Kyokuto’s valuation is at extreme low range because of its low ROE.
For the last 5 years, the highest PBR was only 0.78x and PBR stayed lower than 1x in all of this period. Based on the concept of equity spread (*), PBR below 1x means the return on equity (hereinafter referred to as “ROE”) falls below the cost of equity (hereinafter referred to as “CoE”) which equals to shareholders’ expectation for return.
* When ROE is lower than CoE, it leads to low PBR which is below 1x.

Kyokuto’s PBR in 5 years

(Source:QUICK ASTRA MANAGER, as of 29th May 2019)

We think one of the reasons for such low PBR is Kyokuto’s low ROE.

PBR comparison to peers

(Source:QUICK ASTRA MANAGER, as of 29th May 2019)

ROE comparison – Kyokuto vs sector & TOPIX

(Source:Tokyo Stock Exchange & QUICK ASTRA MANAGER)
(note:Kyokuto reported an extraordinary profit in 2016/3)

From the viewpoint of Enterprise Value (hereinafter referred to as “EV”), Kyokuto’s EV is zero. If the acquisition of Kyokuto is taken place at the current share price, the acquirer will not need any payback period because the acquirer will already gain more profits than investment at the time of acquisition.
Comparing Kyokuto’s EV/EVITDA to the average of the same sector (wholesale trade) in TOPIX and the arithmetic average of entire TOPIX, Kyokuto’s valuation is significantly lower as shown below.
This means that, as a result of not using its invested capital effectively, its Return on Invested Capital (hereinafter referred to as “ROIC”) falls below Weighted Average of Cost of Capital (hereinafter referred to as “WACC”)(**).
**based on the concept that the lower ROIC which falls below WACC, the lower EV which falls below invested capital.

EV/EBITDA Comparison

(Source:QUICK ASTRA MANAGER、using the current quarterly result data, excluded >100x and <-100x names and the number is arithmetic mean of EV/EBITDA. As of 29th May 2019)

One of the reasons for this poor valuation is that Kyokuto lacks awareness of cost of capital.
Listed companies’ mission is to increase shareholders’ value. To achieve this, managements need to focus on making capital efficiency higher than CoE / WACC.
It is also important for Kyokuto to disclose information regarding how it calculates, in what level, its CoE / WACC to increase shareholder’s value through effective dialogue with shareholders.

Present state Assessment To be

PBR remains <1x for a long time (ROE<CoE)

Extreme low EV/EBITDA (ROIC<WACC)

Capital efficiency continues to decline

Invested capital has not been used efficiently

Managements need to be aware of their low capital efficiency.
Managements need to dialogue with shareholders using CoE / WACC

  • 株式会社ストラテジックキャピタル
 

This website is for AGM in 2019. Please find our latest proposal in 2020 here.

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