Low stock valuation due to management ignorance of cost of capital | 極東貿易株式会社 2020
極東貿易
If our proposals are approved and Kyokuto continues 100% payout ratio, the estimated share price is;
>JPY 3,000(*)
*Calculation based on dividend yield. Please find the detail of calculation in “our shareholder proposals”.

The stock valuation of Kyokuto is extremely low.

Over the last 5 years, the highest of PBR was only 0.78x and has never reached 1x. The fact that PBR remains below 1x means the return on equity (ROE) is below the cost of equity (COE) which equals the shareholders’ expected rate of return.(*)
*Based on the concept of the equity spread assuming that the lower ROE falls below COE, the lower PBR falls below 1x.

Kyokuto’s PBR in Last 5 years

(Data Source:QUICK ASTRA MANAGER、May 25 2020)

 PBR of Kyokuto is also low when compared to industry norm.

PBR comparison to companies in the same industry

(data source:QUICK ASTRA MANAGER、May 25 2020)

One reason for such low estimation of PBR is the low ROE.

ROE comparison – Kyokuto, same sector & TOPIX

(Data source:QUICK ASTRA MANAGER)
(Note: For FY2016, the ROE of Kyokuto increased due to recording negative goodwill.)

Below, the low ROE can be clearly seen when comparing Kyokuto to other profitable companies in the same industry with a similar market cap profile.

ROE comparison with peers

(Data source:QUICK ASTRA MANAGER)

From the viewpoint of Enterprise Value (EV), Kyokuto’s EV is calculated near zero. According to such EV, if you acquire Kyokuto at the current share price, you will not need any payback period as the return of investment exceeds the cost at the time of acquisition.
Kyokuto’s low EV/EVITDA shows that, as a result of not using its invested capital effectively, its Return on Invested Capital (ROIC) falls below Weighted Average of Cost of Capital (WACC)(**)which is the rate of return required of a company.
**based on the concept that the lower ROIC falls below WACC, the lower EV falls below invested capital.

EV/EBITDA comparison – Kyokuto, same sector & TOPIX

(Data source: QUICK ASTRA MANAGER, based on arithmetic mean using expected profit and current quarter results, excl securities with EV/EBIDTA >100x and <-100x, Company guidances aren't disclosed as of May 25 2020 very much due to the COVID-19 then the data based on April 24 2020)

Kyokuto’s management lacks awareness of cost of capital. All listed companies have the mission to increase shareholders’ value, and to achieve the mission, management should pursue capital efficiency (ROIC/ROE) which exceeds capital costs (WACC/COE).
In addition to the disclosure of the capital efficiency goal, what is also important for a listed company is to provide information regarding the WACC and its basis of calculation, thus increasing shareholder’s value through effective dialogue with shareholders.

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This website is for AGM in 2020. Please find our latest proposal in 2021 here.

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