Activists emerge at Okayama Paper Industries

There has been some activist activity at Okayama Paper Industries (TYO:3892) recently. Okayama Paper has been in my basket of Japanese stocks for quite a while now. Apparently a Japanese hedge fund with a history of shareholder activism has spoken up at an Okayama annual meeting and subsequently demanded an extraordinary shareholders meeting.

The company has now announced the extraordinary shareholders meeting, which will be held on March 22. Some more information can be found by using Google Translate to decipher the press releases for 2017/01/31 and 2017/02/01 that were published on Okayama’s website.

I have not been able to find much information about the hedge fund. From what I have learned from the translation, the hedge fund is called Musashi Kusunoki. Their website can be found here. I think they are named after a 14th-century Samurai warrior. Here’s some more information about their investment approach.

These are some translated quotes from the January 31 press release:

1. Claimant:
The shareholders who requested this request are Mr. Toshihiro Hosa (Hiroshima Prefecture Fukuyama City), Mr. Hiroshi Yamanaka (Bunkyo Ward, Tokyo) and a joint association Company Musashi Kusunoki

2. Items that are the object of this claim:
Removal of director Kotaro Tsugawa, acquisition of treasury stock, partial change of the articles of incorporation

3. Reason for convocation (abstract):
Amidst the sluggish stock price of the Company, the claimants requested a fundamental management reform of the Company, At the general shareholders’ meeting Shareholder proposals such as entering the biomass power generation business, acquiring additional treasury stock. However, the management team of the Company did not show attitudes to respond to shareholders’ dialogue at all […]

We managed a general shareholders meeting that seems to be bullish. Our stock price is stagnating in ROE (shareholders’ equity earnings) Management who do not understand the concept such as rate etc. continues to operate in harmony with other directors. Changes in the composition of the Board of Directors that can undertake fundamental management reforms, including the replacement of representative directors is essential.

Even though Okayama Paper Industries has regularly bought back shares over the last five years, the hedge fund is right to suggest more action on this front. The company has about ¥5.5 billion of cash and investments and no debt. A large tender offer at a substantial discount to book value makes a lot of sense.

I believe the fund currently owns just 1.3% of the outstanding shares, so it seems hard to get anything done. The major shareholder is Oji Holdings (TYO:3861), which owns 41% of the shares and is a publicly traded company as well. Oji Holdings’ market cap is ¥510 billion, while Okayama’s is microscopic in comparison with just ¥3 billion. The ideal scenario for small shareholders is probably a buyout by Oji Holdings, but I have no idea if that is realistic. Regardless, calling management out at an annual meeting and now forcing them to hold an EGM are positive developments for shareholders. The agenda for the EGM has not been announced yet.

This activism probably explains why Okayama’s stock has done pretty well so far this year (up ~22%). At ¥618 the company has a market cap of ¥3 billion, which means it is still trading at just 0.37x book value and 0.51x NCAV (including long-term investments). Okayama has remained solidly profitable and cash producing since I’ve held the stock. The price has gone up about 60% since then. Given the activist involvement and the still very depressed valuation, I don’t plan to sell just yet.

Disclosure: long Okayama Paper Industries (TYO:3892)