Managements don't cope with the poor valuation because they lack awareness of cost of capital | 蝶理の株主価値向上に向けて
What we hope Chori to increase the shareholders' value as a shareholder are
1.Drastic increase in dividend / share buyback to prevent further lowering of ROE
2.Dissolution of cross-shareholdings
3.Transform to a board led by independent outside directors


Managements don’t cope with the poor valuation because they lack
awareness of cost of capital

Reviewing the valuation of Chori’s stock price in these 5 years, its PBR has been above 1x for a limited period only, but mostly below 1x. Based on the concept of equity spread (*), PBR below 1x means the return on equity (hereinafter referred to as “ROE”) falls below the cost of equity (hereinafter referred to as “CoE”) which equals to shareholders’ expectation for return.
*When ROE is lower than CoE, it leads to low PBR which is below 1x.

Chori’s PBR in 5 years

(Source:QUICK ASTRA MANAGER)

From the viewpoint of Enterprise Value (hereinafter referred to as “EV”), Chori’s valuation is also poor. Comparing Chori’s EV/EBITDA to the average of the same sector (wholesale trade) in TOPIX and the arithmetic average of entire TOPIX, Chori’s EV/EBITDA is the cheapest as shown below.
This means that, as a result of not using its invested capital efficiently, its Return on Invested Capital (hereinafter referred to as “ROIC”) falls below Weighted Average of Cost of Capital (hereinafter referred to as “WACC”)(**).
**Based on the concept that the lower ROIC which falls below WACC, the lower EV which falls below invested capital.

EV/EBITDA Comparison

(Source:QUICK ASTRA MANAGER、using the current quarterly result data and arithmetic
average value of EV/EBITDA, excluded stock names which are over 100x and below
-100x. As of end of 23rd May 2019)

One of the reasons for this poor valuation is that Chori lacks awareness of cost of capital.
Listed companies’ mission is to increase its shareholders’ value. To achieve this, managements need to focus on making capital efficiency higher than CoE / WACC.
It is also important for Chori to disclose information regarding how it calculates, in what level, its CoE / WACC to increase its shareholder’s value through effective dialogue with shareholders.

Present state Assessment To be

PBR remains <1x for a long time (ROE<CoE)

Extreme low EV/EBITDA (ROIC<WACC)

Capital efficiency continues to decline

Invested capital has not been used efficiently

Managements need to be aware of their low capital efficiency.
Managements need to dialogue with shareholders using CoE / WACC.

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