How ValueAct may bring an amicable approach to help boost margins at this Japanese medical device company

Business: Nihon Kohden is a Japan-based company engaged within the analysis, improvement, manufacture and sale of medical digital tools, in addition to the supply of upkeep and restore companies. The company affords a big selection of units to help with medical diagnoses, together with electroencephalographs, evoked potential testing tools, electrocardiographs, cardiac catheterization tools, diagnostic info methods and associated consumables. The company can be engaged within the gross sales promotion for its merchandise, in addition to the overall affair-related and manpower dispatching companies.

Stock Market Value: $2.6B ($31.02 per share)

This is the third Japanese medical device company ValueAct has invested in. Notably, the agency invested in Olympus in 2017, obtained a board seat in 2019 and stays on the board at the moment. Both Olympus and Nihon Kohden are international medical device corporations. However, Olympus derives 80% of its income from exterior of Japan, whereas Nihon Kohden will get roughly 40% of its income from exterior of Japan. However, each corporations have wonderful merchandise and an ambition to be international, and Nihon Kohden might comply with a path to globalization that is just like the one Olympus has taken.

There are three main levers for worth era at Nihon Kohden: working margin enlargement, optimizing the combination of apparatus versus consumables and companies income, and disciplined capital allocation. First, regardless of having 51% gross revenue margins, Nihon Kohden’s working margins are solely at 10%, whereas rivals in each Japan and overseas are within the mid to excessive teenagers. With roughly 60% market share in Japan, the place a few of its income comes from distributing third-party merchandise, and 10% market share within the U.S., the place the company has proprietary merchandise, the expansion and margin potential is larger within the U.S. Nihon Kohden can use its reputational energy to capitalize on the U.S. market. The company has an alternative to rapidly get to 15% working margins inside a couple of years and might see incremental enchancment in following years.  

Second, Nihon Kohden has traditionally been centered on {hardware} gross sales and its income is break up roughly evenly between {hardware} and consumables and companies. However, there’s an alternative for worth creation if the company pursues a technique to enhance its income from consumables and companies due to the recurring nature and better margins of that kind of income. From these two methods alone, Nihon Kohden can drive 20% revenue progress over the subsequent three years.

Third, the company is at the moment sitting on web money equal to about 15% of its market cap. Like many Japanese corporations, Nihon Kohden might create worth from an accretive capital deployment technique that evaluates returning capital to shareholders or disciplined M&A. Historically, shopping for again shares hasn’t been a well-liked tactic in Japan, however share repurchases have been growing over latest years. The Tokyo Stock Exchange has been encouraging them as a part of a course of to get corporations to commerce over one occasions e book worth.  

ValueAct has an earned popularity as a collaborative and amicable activist, and there’s no cause why this scenario needs to be any totally different. Before increase such a place, ValueAct probably has been getting to know administration over the previous 12 months and spent appreciable time with CEO Hirokazu Ogino. Moreover, ValueAct wouldn’t have made this funding if the agency didn’t have a excessive diploma of respect for Ogino and the remainder of the administration group. We count on that ValueAct and administration are aligned on their views, significantly with respect to margin enchancment and capital allocation.

ValueAct doesn’t take board seats by means of concern or pressure, however organically through dialogue and concord. Accordingly, we might count on the agency to proceed to help administration as an lively shareholder and solely take a board seat at a time that each ValueAct and administration really feel the investor might add worth. At Olympus, that took two years. At JSR, it took over a 12 months. Both corporations have been extremely profitable engagements for them, returning 109.48% at Olympus versus 7.68% for the MSCI EAFE, and 116.86% at JSR versus 38.57% for the MSCI EAFE. ValueAct continues to be on the board at each corporations. An identical final result right here may end up in virtually a doubling of the inventory in two to three years.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.