Toyo Suisan's Noodle Giant Activist Proposes Strategies to Boost Shareholder Value

Company: Toyo Suisan Kaisha (2875.T)

Toyo Suisan Kaisha and its affiliates produce and sell food products in Japan and abroad through various segments such as Seafood, Overseas Instant Noodles, Domestic Instant Noodles, Frozen and Refrigerated Foods, Processed Foods, and Cold Storage. The company procures, processes, and sells seafood and offers a range of products including instant cup and bag noodles, soup, and processed foods.

Activist: Nihon Global Growth Partners Management

Percentage Ownership: 3.8%

Average Cost: n/a

Nihon Global Growth Partners Management is a long-term investor in Japanese-listed companies that are experiencing rapid growth in markets outside of Japan. Prior to founding Nihon Global in 2018, the firm's principals were involved in managing a private equity program in Japan since 2004. As private equity investors, the principals have completed nine buyouts, including three listed companies in Japan. All of the principals' prior private equity investments involved Japanese companies where a significant portion of the growth was in markets outside of Japan.

What's happening

Behind the scenes

Nissin Foods (2897.T) is a globally recognized and respected instant noodle company, while Toyo Suisan has outperformed Nissin in North America, a profitable and rapidly expanding market. Despite this, Nissin trades at a higher price-earnings multiple due to its focus on the instant noodle market. Nissin also boasts a clear 40% dividend payout ratio and engages in share buybacks. In contrast, Toyo Suisan lacks a shareholder return policy and has not set targets for return on equity, dividend on equity, dividend payout ratio, or total shareholder return, as stated in Nihon Global's presentation. Additionally, Toyo Suisan has not conducted a share buyback in 17 years.

If Toyo Suisan were to become a pure-play noodle company with better capital allocation practices, it could close the 8 times P/E multiple discount that it currently trades at compared to Nissin Foods. As the dominant player in the North American market, Toyo Suisan would then be well-positioned to consolidate the instant noodle market, which is ripe for consolidation with two to three players controlling the industry. With this plan, Nihon Global estimates that the intrinsic value of the company is 17,300 yen per share or more, compared to the low 10,000 range.

An activist campaign in Japan highlights three key themes in Japanese activist investing. Firstly, it demonstrates the potential for activists in Japan to create significant shareholder value through reasonable shareholder proposals. Secondly, it highlights the limitations of activism in Japan, where ambitious plans, even if logical, may not be feasible in the early stages of a campaign. Lastly, there is a growing trend in Asia of private equity investors turning to public company shareholder activism. While shareholder engagement in Japan is still relatively new for public investors, private equity investors have been doing it for decades. As a result, many former private equity investors are now entering the space. Brian Doyle of Nihon Global and his team, as well as Hiroyuki Otsuka, a former deputy head of Carlyle Group's Japan business, are examples of this trend.