Governance For Yutaka Foods Corp
Yutaka is Deeply Undervalued
Yutaka has been profitable every year going back to 1995 (and even earlier), which shows its management team has done well and has managed to add value to the Company’s core business.
Despite these achievements, it is clear that the market significantly undervalues the Company. At the market price of JPY1,800/share, the Company has a market capitalization of JPY12.5 billion, which is lower than the net cash position of the Company of JPY16.1 billion.
This suggests that the market is valuing the Company’s core business at zero or at a negative valuation, which is not rational given the Company’s long term track record of profitability spanning more than 25 years.
The following reasons could have possibly resulted the deep discount to Yutaka’s fair value in terms of market valuation.
1. Capital inefficiency
The Company’s ROE has been disappointing, averaging just 4.7% for the past 5 years even though business performance has been improving. When a policy of accumulating equity capital (through a low payout ratio) is adopted, capital efficiency will decrease because capital will increase faster than profits. As capital efficiency declines, valuation will also fall.
The Company’s shareholders’ equity has increased significantly in the past and current equity ratio of 86% is extremely high and is also significantly higher than the other similar food companies in the industry.
This large equity ratio and net cash position is a significant drag on ROE.
2. Poorly perceived corporate governance
The Company is a 51% listed subsidiary of Toyo Suisan with many inherent potential conflicts of interest, and it is natural that the market will have some perceived corporate governance concerns. The possible perception from the market that Yutaka has poor or insufficient corporate governance as a listed subsidiary, could be one of the important reasons for the deep discount to its fair value.
This is especially as 80% of the Company’s revenue is from sales to Toyo Suisan, as well as the fact that key board members are originally executives from Toyo Suisan. In addition, the Corporate Governance Guidelines (“CGG”) of Yutaka and its parent company are almost identical, Yutaka has not set management targets such as ROE, even though such points are specifically stated in the CGG.