HONG KONG--(BUSINESS WIRE)--Oasis Management Company Ltd. (“Oasis”) is the manager to funds that beneficially own 7.92% of Katakura Industries Co. Ltd. (3001 JT) (“Katakura” or the “Company”), making Oasis the largest single shareholder of the Company. Oasis has adopted the Japan FSA’s “Principles of Responsible Ownership” (a/k/a Japan Stewardship Code) and in line with those principles, Oasis monitors and engages with its investee companies.
Since Oasis’s first meeting with Katakura, on February 24, 2015, Oasis has continued to strive for a constructive dialogue with the Company. Oasis has been extremely patient and has gone to great lengths at its own expense, both financially and in terms of the time involved, in order to provide suggestions or help to improve Katakura. This has included sending letters and making presentations to Katakura’s management in an attempt to assist in creating medium- to long-term corporate value.
At the 2017 AGM, Oasis submitted shareholder proposals for the purpose of focusing Katakura’s management on adopting Return on Equity as a performance metric for its divisions, restructuring loss-making and underperforming businesses, and improving capital allocation. Following these proposals, Katakura finally initiated a dialogue with us, but unfortunately Katakura saw the dialogue as an end in itself with no intention to make it constructive. According to METI’s Guidance for Integrated Corporate Disclosure and Company-Investor Dialogue for Collaborative Value Creation, “It is essential to avoid treating disclosure and dialogue, which are means to an end, as ends in themselves, and to maintain a focus on how companies can achieve sustainable value creation and how companies and investors can cooperate with each other to achieve the goal.”1
Katakura has failed woefully in this regard.
Oasis’s latest attempt to help Katakura was to ask for the nomination of two independent directors that are experts in two of Katakura’s core businesses, Real Estate and Textiles, or at the very least appoint them as consultants. Both of these candidates are experts in their fields and could, without doubt, provide valuable advice to Katakura. In addition, Oasis also recommended that Katakura appoint an independent third-party to undertake a strategic and operational review of the business. Both of these requests would be highly positive for Katakura, but were flatly refused by the Company.
Katakura’s uninspired five year plan entitled “Katakura 2021”, having had to already revise down forecasts for Fiscal Year 2017, and its disinterest in having a constructive dialogue with shareholders, have impelled Oasis to submit additional shareholder proposals for the upcoming Annual General Meeting to be held in March 2018.
Katakura remains deeply undervalued with significant potential
Katakura has substantial undervalued assets that the market has failed to realize. Katakura is too often seen as a silk and pharmaceutical company, but investors miss that almost all of its operating income is derived from its vast real estate assets, which are not fully valued on its balance sheet. Katakura is in an enviable position of having significant assets to utilize and invest in growing businesses; however, to date it invests heavily in immaterial businesses and continues to invest in businesses in which it has failed.
In February 2017, Katakura released its “Katakura 2021” five-year management plan. The plan was disappointing, although there were a few positives, including the plan to enact and complete structural reforms, including the downsizing or exit from unprofitable businesses by the end of Fiscal Year 2018. Nevertheless, Katakura’s plans for its existing businesses leave much to be desired, but this does not need to be the case. Katakura should take the opportunity before it’s too late.
Katakura is trading at 0.86x price to book ratio, however, this excludes the value of Katakura’s large land holdings. In its annual report, Katakura provides a conservative market valuation of the real estate that has been developed and is operational. In FY2017, Katakura reported this to be ¥121.3 billion compared to its book value of ¥35.3 billion. Including these unrealized gains net of tax to equity reveals that Katakura is trading at just 0.42x book (excluding minorities). This is very conservative for the following reasons:
i. Many valuations for the notes to the financial statements are made on
a conservative basis; and
ii. This only includes the value of the developed land and Katakura owns significant undeveloped real estate.
If management focuses their attention on developing and selling more of its owned land, then we value Katakura at 0.8x adjusted book, an upside of 90%.
Oasis shareholder proposals
Oasis has submitted the following six agenda items to Katakura for a general shareholders meeting for the fiscal year ended December 2017 in order to realize sustainable growth through governance restructuring. The full statement of Oasis’s shareholder proposals and further details about the campaign can be found on our campaign website: www.abetterkat.com
We believe that all shareholders and stewards of capital should review these proposals closely. We believe they are all consistent with the Corporate Governance Code and the Stewardship Code, and Oasis encourages all shareholders to vote in favor of the proposals.
- Agenda Item (1) – Removal of Director.
- Agenda Item (2) – Partial Amendment of Articles of Association (increase number of directors from 10 to 12).
- Agenda Item (3) – Appointment of One Director (Mr. Akira Harata – a famed commercial and retail facility developer and operator).
- Agenda Item (4) – Appointment of One Director (Mr. Etsuro Nakanishi – former representative director of Descente Ltd and expert in growing apparel sales overseas).
- Agenda Item (5) – Appropriation of dividend (calling for ¥127 per share compared to historical ¥10 per share).
- Agenda Item (6) – Partial Amendment of Articles of Association (a. ROE Orientated Corporate Management; b. Withdrawal from Low ROE Businesses; c. Restriction on Entering Businesses without High ROE Prospects).
Oasis’s Response to Katakura’s Announcement on March 6, 2018
Following the submission of the Oasis shareholder proposals to Katakura, the Company announced on March 6, 2018 the resignation of Chairman Akio Takeuchi and Senior Managing Director Atsushi Tanaka from the Board of Directors. We hope that this is a turning point in corporate governance at Katakura; however, Takeuchi-san and Tanaka-san are just scapegoats for President Kimiya Sano, who is the main culprit for Katakura’s poor results, weak strategy, and substandard corporate governance, and should be held liable for this litany of failures. We continue to recommend that shareholders vote against President Sano’s reappointment when they vote their proxies in the upcoming weeks.
These resignations should galvanize shareholders to push for more extensive change, and vote for the Oasis shareholder proposals discussed above.
For all inquiries, please contact Taylor Hall at email@example.com.
Oasis Management Company Ltd. 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.