Pursuing the maximization of PER by building up excellent M&As
PER basically reflects expectations from capital markets, and in that sense is a reflection of a company’s growth potential. Our FY2021-end PER (for the next 12 months) was 37x (see the chart below). In fact, our PER has outperformed the TOPIX chemical sector average and the average of competitors over the past 10 years. I believe this reflects on the high expectations for our growth potential, many of which we have delivered, among investors. I will continue to take actions, including but not limited to, proactive capital markets communications, executing optimal financial strategy, and sustainability initiatives, in order to respond and exceed these expectations. Further, I will continue to constantly build on our track record of excellent M&A deals that contribute to our future growth with the goal of maximizing our PER.
■NPHD 27.9x (+15.9x)
■Average of competitors (average value) 26.1x (+9.0x)
■Average of competitors (mean value) 21.8x (+7.4x)
■The TOPIX chemical sector average 12.6x (+1.0x)
Assembling excellent talent and brands through M&A, building on organic growth
Following our appointment as Co-Presidents, I, with Wee Siew Kim and the board members, have held extensive discussions about the ideal business model. We raised emphasis on the autonomy and accountability at every partner company while maintaining a small headquarters. Our goal is to achieve strong growth with limited risk by building up M&A deals in the attractive market of paint and adjacencies. This is no change to our existing strategy but rather a crystallization of our business model in pursuit of our sole mission of Maximization of Shareholder Value (MSV). We decided to call it Asset Assembler model.
Our financial strategy that drives Asset Assembler model
We believe it is essential to secure stable funds through our financial strategy in order to maximize the benefits of Asset Assembler model that aims to accelerate growth through both existing businesses and M&A. We are therefore focusing on the management of a sound balance sheet by ensuring financial discipline and building an optimal capital structure.
The key elements of our financial discipline are the following: ①Prioritizing debt financing, ②Maintaining sufficient leverage capacity and enhancing engagement with financial institutions and rating agencies, and ③Equity-based capital raising remaining an option with EPS accretion as a premise. The paint and adjacencies businesses have a very high cash generation capability. In addition, our Japan domicile gives us the ability to obtain funds at low interest rates to satisfy our strong demand for financing procurement as we pursue our aggressive M&A strategy. Accordingly, we prioritize debt financing over equity-based capital raising. Maintaining sufficient leverage capacity is essential to continuing to procure finance at low cost, which requires us to maintain our earnings growth through our existing businesses andM&A. Equally important is obtaining highly positive evaluations from the understanding of financial institutions and rating agencies. The use of debt financing and leverage will contribute to maximizing EPS through M&A. Equity-based fund raising remains an option assuming that the deal is EPS-accretive, and by selecting the optimal combination of financing methods, the company will pursue unrelenting growth without setting any upper limit.
◆Status of assets
We review the status of assets as necessary in accordance with change in the market environment to ensure a sound balance sheet and the efficient utilization of assets. Taking into consideration the impact of the pandemic, we are reviewing business terms in every region and business to improve our Cash Conversion Cycle (CCC). In addition, we are taking actions to respond to future credit collection risk by recording a provision for possible credit loss on the trade receivables of some real estate developers following the deterioration of conditions in the Chinese real estate market. Every year we examine whether or not it is reasonable to continue to hold cross-shareholdings, and we disposed of some of cross-shareholdings in FY2021. Our property, plant and equipment, goodwill, and other assets are increasing every year as we continue to reinforce our manufacturing facilities and to aggressively execute M&A deals for future growth. At the same time, we have been taking measures to improve our asset efficiency and profitability, such as the transfer of the European automotive coatings business and the India businesses and the structural reform of the Japanese businesses and the marine coatings business. In addition, we are reducing the risk of impairment losses on goodwill by minimizing PMI risk through autonomous and decentralized management and building up excellent quality mergers and acquisitions.
◆Status of debts
As regards to the liability situation, we are prioritizing debt financing to secure the funds for growth by engaging in M&A and other investment activities. Accordingly, the net debt/EBITDA ratio, which indicates financial leverage, is expected to increase by about four times at the end of FY2022, from 3.4 times (after adjusting for one-off items) at the end of FY2021 before the completion of the Cromology acquisition. (See “Progress of the Medium-Term Plan (FY2021-2023)”. Basically, all our borrowings are in yen, with an average maturity of 5 years and an average before-tax interest rate of 0.4%, which means that they comprise an extremely stable debt composition. We will continue to procure finance at low interest rates and long-term maturities. We will also continue to pursue an optimal capital structure as well as to obtain highly positive evaluation and trust from lending financial institutions and rating agencies, in order to maintain sufficient leverage.
Based on our judgment that we need to reinforce our financial base to achieve further growth through M&A, we issued new shares through a third-party allotment in FY2021, thereby increasing capital. EPS accretion starting in the first year of acquisition is an important criterion for our judgment on M&A deals. Another key point is capital efficiency where we place emphasis on achieving ROIC that exceeds WACC.
The focus of our equity policy is to raise total shareholder return (TSR) through earnings per share (EPS) growth by prioritizing growth investments while maintaining financial discipline. As part of our effort to raise TSR, our policy is to maintain steady and consistent dividend payments with a target dividend payout ratio of 30% while taking full account of factors including the trend in earnings and investment opportunities available. In FY2021, we paid an annual dividend of ¥10 per share, including the special dividend of ¥1 per share to commemorate the 140th anniversary of the foundation of the company.
Balance sheet management policy
As of the end of December 2021
- Cash and equivalents ¥138.8bn
- Trade and other receivables ¥266.9bn
- Assets held for sale ¥3.9bn
- Property, plant and equipment ¥301.7bn
- Goodwill ¥652.7bn
- Other intangible assets ¥300.2bn
- Total ¥1,955.1bn
“Cash and cash equivalents” and
“Trade and other receivables”
- Review the cash conversion cycle (CCC) in response to reflect the impact of the pandemic and deterioration of the conditions in the Chinese real estate market (e.g., review trade terms and conditions)
- Take actions to respond to future credit collection risk (e.g., recording a provision for possible credit loss in China)
“Assets held for sale”
- Examine the rationality of continuing to hold cross-shareholdings every year (disposed of some cross-shareholdings in FY2021)
“Property, plant and equipment”
- Take actions to improve asset efficiency and profitability through business divestiture and structural reform (e.g., transfer of the European automotive coatings business and the India business and structural reform of the Japanese businesses and the marine business)
“Goodwill” and “Other intangible assets”
- Minimize PMI risk based on autonomous and decentralized management and reduce impairment losses by building up excellent quality mergers and acquisitions
- Trade and other payables ¥209.7bn
- Bonds and loans payable ¥523.0bn
- Total ¥986.4bn
“Bonds and loans payable”
- Prioritize debt financing and maintain the leverage capacity (the expected net debt/EBITDA at the end of FY2022 is around 4x)
- Evaluation from credit agencies (maintained the “A” rating from R&I)
- Stable finance procurement capability in yen (low interest rate/long-term maturity)
- Capital ¥671.4bn
- Retained earnings ¥228.0bn
- Total ¥968.7bn
- Reinforce financial base to prepare for growth investment such as M&A (capital increase based on new share issuance through a third-party allotment)
- Equity-based capital raising remaining an option with EPS accretion as a premise
- Include capital efficiency in the consideration of M&A decisions, including achieving ROIC that exceeds WACC
- Aim to maintain the dividend payout ratio at 30%
* Figures for FY2017 are based on JGAAP and figures for FY2018 to FY2021 are based on IFRS