3D Investment Partners Pte. Ltd. as investment manager of 3D OPPORTUNITY MASTER FUND (together “3D,” “we” or “us”) announced that leading independent proxy advisory firm Glass, Lewis & Co. (“Glass Lewis”) has joined Institutional Shareholder Services (“ISS”) in recommending that shareholders of Fuji Soft Incorporated (“Fujisoft” or “the Company”) (9749.T) vote “FOR” 3D’s two director nominees – Kanya Hasegawa and Keiji Torii – at Fujisoft’s Annual General Meeting of Shareholders to be held on March 11, 2022.
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Glass Lewis concluded that “shareholders should support the Dissident’s campaign to elect both of the Dissident Nominees at this meeting.” In reaching this conclusion, Glass Lewis noted that the Company’s “relatively weak profitability and margins have unfortunately been a longstanding trend that has gone largely unaddressed,” and that 3D has “outlined a series of potential solutions that we believe should warrant a more in-depth review by the Company’s board.” Glass Lewis highlighted the qualifications of 3D’s candidates, noting that “Mr. Hasegawa has an extensive background in capital markets and capital allocation in Japan and Asia through his various roles working at investment firms, while Mr. Torii has a long history of serving in leadership or advisory roles for various public and private Japanese firms.”
Glass Lewis also noted:
- “…over the longer-term unaffected periods, the Company’s TSRs significantly lag the median returns of the Dissident Peer Group and the returns of the Industry Index.”
- “…the trailing EBITDA margin of the Company is well below that of its peers… Further, the profitability ratios of the Company (i.e., return on capital and ROE) significantly trail those of its peers…for the past 20 quarters…the EBITDA margins, return on capital and ROE of the Company have consistently underperformed its peers.”
- “We believe the relatively mediocre management projections regarding the Company’s margins and profitability might be more acceptable…if the Company was at least expecting to generate outsized revenue growth in the coming years. However, we see that the Company is only targeting a three-year CAGR in revenue of 5%, which would merely be in line with the current average annual revenue growth rate of its peers…there may be evidence to suggest that the board is not doing enough to drive greater improvements in the Company’s performance relative to its peers.”
- “The Company publicly claims that if its properties were treated as production plants, the return on the Company’s real estate investments could be calculated as being over 30%…the Company has not publicly disclosed the specific algorithm that it used to arrive at the foregoing figure, as the disclosure surrounding this calculation is decidedly vague… the Company’s claim in this respect offers little, if any, practical utility to investors.”
- “…the addition of a short slate of shareholder-centric director nominees could serve as a reasonable counterbalance to the potentially outsized influence of the Company’s longstanding directors, particularly that of Mr. Nozawa.”
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Glass Lewis is the second proxy advisory firm to recommend in favor of 3D’s proposal to appoint Kanya Hasegawa and Keiji Torii to the Fujisoft Board. In its report last week, ISS concluded that “shareholders are recommended to support dissident nominees Kanya Hasegawa and Keiji Torii.” In reaching its determination, ISS noted that “the election of two additional outside directors with finance, accounting, and capital allocation experience would help reevaluate current and future investment plans and decide the right path forward.”
ISS also pointed out a number of performance and capital allocation issues at Fujisoft:
- “Overall, operational performance has lagged behind peers over a prolonged period. Management’s track record of capital allocation appears questionable. … Management’s target ROE of 9.0 percent by FY24 appears unambitious when compared to a median ROE of 13.5 percent that peers delivered in the latest fiscal period.”
- “Over the five-year period through Feb. 17, 2022, … Fuji Soft’s TSR of 192.1 percent was substantially below the median TSR of 257.5 percent for its peers. Fuji Soft’s TSR performance of 112.3 percent over the three-year period … also lagged behind the peers’ TSR of 133.8 percent. The company underperformed anyof the selected peers over this shorter period.”
- “Fuji Soft’s average operating margin of 6.0 percent for the last five years has the lowest among its peers. Moreover, the margins are low despite the company owning most of the real estate it uses in its operations.”
- “We note that Fuji Soft’s ROIC has lagged behind any of its peers in any given year over the selected performance period. The company’s chronic underperformance vs. peers in terms of ROE and ROIC is at least partly due to its suboptimal capital structure.”
- “Fuji Soft’s total net property, plant and equipment (mostly real estate and land) represents 77 percent of total fixed assets against less than 30 percent for the peers’ median. This high amount of low- to no-income producing tangible fixed assets appears to be a key factor for the company’s relative underperformance against peers in terms of ROE and ROIC.”
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