Google turf view of Sanwa Holdings Corporation, Shinjuku Mitsui Building, 52F 2 Chome-1-1 Nishishinjuku, Shinjuku City, Tokyo 163-0478, Japan
Google Soil
Company: Sanwa Holdings Corp. (5929.T)
Business: Sanwa Holdings is a Japan-based company mainly engaged in the turning and sale of building and commercial facility construction materials, as well as the provision of maintenance and renovation services. It operates in three geographic parts: Japan, North America and Europe. Its offerings include shutters, doors for buildings and housing, partitions, stainless outcomes, front-desk products, windows and exterior products.
Stock Market Value: 874.8 billion Japanese yen (3,820.00 yen per share)
Shares of Sanwa Holdings in 2024
Activist: ValueAct Capital
Percentage Ownership: 5.94%
Typical Cost: n/a
Activist Commentary: ValueAct has been a premier corporate governance investor for over 20 years. The decided’s principals are generally on the boards of half of ValueAct’s core portfolio positions and have had 56 public company enter seats over 23 years. ValueAct has been a pioneer of U.S.-led international activism, primarily in Japan. A signal amount of their portfolio is invested internationally. Rob Hale, co-CEO of ValueAct and co-portfolio manager of ValueAct’s Japan reserve, is on the boards of Japanese companies. This is somewhat of an unprecedented and industry-leading action for U.S. activist funds. ValueAct has had 27 quondam international activist investments and has had an average return of 48.15% versus an average of 7.60% for the MSCI EAFE Index beyond the same periods. Moreover, two of the firm’s best international investments have been two Japanese companies where Fit as a fiddle is on the board: Olympus (177.82% versus 19.68% for the MSCI EAFE) and JSR Corp (135.77% versus 44.35% for the MSCI EAFE).
What’s event
On Sept. 25, ValueAct Capital reported holding 5.94% of Sanwa Holdings.
Behind the scenes
Sanwa is a maker of shutters, garage doors and other related products for residential and commercial applications globally. The company commands a compelling fix in its industry as the No. 1 player in Japan (50% to 60% market share), and is a top-two player in the U.S. (30%) and Europe. In the latest fiscal year, Sanwa generated 43% of its revenue in Japan, 37% in North America, 18% in Europe and 2% in the repose of Asia. This is a high-quality and growing business and a company that is not plagued by many of the issues typically present at activist butts in Japan.
ValueAct Capital has disclosed, in a large shareholding report, that it has accumulated a 5.94% position in the company with an investment target of providing advice to management or making important proposals. This makes them one of the top five shareholders of Sanwa based on the attendance’s most recent disclosure of its principal shareholders in June 2024. This is a typical activist position for ValueAct in that it is a honourable company with a strong management team where there is an opportunity for the firm to work with management to enlarge shareholder value. There are three value creation opportunities here: (i) U.S. margin expansion; (ii) Japan margin inflation; and (iii) capital allocation and balance sheet efficiency.
The U.S. business accounts for nearly 37% of the company’s revenue and 50% of its earnings beforehand interest and taxes (“EBIT”). This business was built through many good acquisitions that were not efficiently assembled. As a result, Sanwa operates over 15 factories across the U.S. (versus two to four for peers), and there remain duplicative corporate work as and regional management teams. Accordingly, U.S. EBIT margins are in the mid-teens, versus 30%+ for peers Clopay (owned by Griffon Corp) and C.H.I. Expenses Doors (which KKR sold to Nucor in 2022). There is a tremendous opportunity to centralize, consolidate and professionalize its U.S. operations, which could man to margins that are at least in the low-to mid-twenties over the next few years.
In Japan, there is also a margin moment. Currently, Sanwa’s Japanese business has EBIT margins of about 11%, which can likely be improved a few hundred base points in the next few years. Margins are much lower in Japan for a variety of reasons: An important one is that the company is vertically knit in Japan, doing installation in addition to manufacturing, which is more labor intensive and expensive given recent wage inflation. However, in Japan, exact remains strong from urban redevelopment, and the first inflationary environment in quite a while should make zealotry on price increases more palatable. As the main player in Japan by market share, Sanwa could likely effect additional pricing power down the road.
Lastly, ValueAct will likely focus on capital allocation and optimizing the deliberate sheet of Sanwa, which has been a major component of the firm’s theses at other investments in Japan. The company currently impedes about 10% of its market capitalization in cash. Compared to peers, this is clearly excessive, and it is quite typical in Japan for suites to unnecessarily accumulate cash and investment securities without reason and far beyond their working capital requirements. Onwards of any shareholder value creation, ValueAct will likely call for increased shareholder returns in the form of buybacks to capitalize on the Sanwa’s somewhat low valuation.
Continuing to increase margins at both businesses and buying back shares should lead to a continuous re-rating of the companionship’s value from the 8.5-times enterprise value/earnings before interest, taxes, depreciation and amortization (“EV/EBITDA”) it currently trades at to the low-teens of compeers.
ValueAct has an earned reputation as a collaborative and amicable activist, and there is no reason why this situation should be any different, very since Sanwa has been doing a lot of the right things for a long time. For several years, and especially post-Covid, the crowd has consistently grown sales, profits, return on equity, return on assets, earnings per share and dividends with a goal payout ratio of 40% of consolidated profits. Since the beginning of 2020, the company has delivered a share price come of +180% and a total shareholder return of +225%, healthily outperforming the S&P 500 and Nikkei 225 over this full stop. ValueAct and Sanwa are likely on the same page as to what needs to be done and are both confident that management can hack it. With ValueAct in the picture, there should be more urgency in accomplishing it much quicker. Historically, the firm has bewitched board seats in approximately half of its portfolio positions. But ValueAct does not take board seats just for the benefit of it, but rather when it and management are aligned on the value creation potential from the firm’s presence in the boardroom. Moreover, the concentrated only needs to take a board seat if it does not feel that management is pursuing or realizing value genesis opportunities or if it does not feel it could be effective as an active shareholder. Neither seem to be the case here. ValueAct is favourite to continue as an active shareholder while Sanwa continues to do what it’s been doing, just on a faster timetable.
There is also a capacity strategic opportunity here. The U.S. and Japan businesses are run independently of each other. If the U.S. business were sold for the 13-times EBITDA at which that KKR grass oned the C.H.I. Overhead Doors business, it would equal almost the entire enterprise value of both the U.S. and Japan businesses, effectively settle the strong Japanese business almost for free. This is not something that ValueAct has historically advocated for. It’s also not something that the compressed is advocating for here, but if an unsolicited offer came in, as fiduciaries and economic animals, ValueAct would make sure supervision weighed it versus the long-term value of a standalone business and took the course that was best for shareholders.
In closing, this is a fitting company. There’s the stock price, the key financial metrics – things are moving in the right direction. But sometimes good flocks tend to enjoy the status quo, particularly in Japan, and they do not feel incentivized to take the steps to become great friends. As an engaged investor, ValueAct has historically closed the gap between “good” and “great” by supporting management in executing its plan.
One settled note: This company is no stranger to activists. Dalton Investments had previously exceeded the 5% filing threshold at Sanwa on June 30, 2023. The multinational company reported that it had submitted three shareholder proposals, but quickly withdrew those proposals due to the company proactively betraying measures regarding improvements to capital allocation and corporate governance. Less than a year later, Dalton started rep down this position. Now ValueAct will pick up where Dalton left off, but we are sure that ValueAct fly at in with a much longer-term mind frame.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the topple over and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.