Fir Tree Files 5.10% Stake in JR Kyushu; Working with Management to Boost Shareholder Returns and ROE

NEW YORK and TOKYO, Dec. 19, 2018 /PRNewswire/ -- Fir Tree Partners ("Fir Tree" and "the Fund") today filed a 'Large Shareholding' report at the Kanto Local Finance Bureau in Japan, disclosing a 5.10% beneficial ownership of Kyushu Railway Company ("JR Kyushu" or "the Company") (TSE ticker 9142) common stock.

Fir Tree has held economic ownership in JR Kyushu since its initial public offering more than two years ago, and has increased its investment to 5.10% because it strongly believes the Company is well-managed, has a unique business model and is significantly undervalued.  

Aaron Stern, Managing Director and Partner at Fir Tree, said: 

"In line with our Stewardship philosophy, we have been in constructive dialogue with JR Kyushu for more than two years.  We have been impressed by their profitable turnaround of the rail business, and their development of prime land into dominant cash-flow generating real estate assets. The key is to close the valuation gap by right-sizing the balance sheet in the new Medium-Term Plan.  We are committed to further engagement in support of the JR Kyushu management team through this process."

While its rail peers trade at an average of 11 times EBITDA with substantial net debt, JR Kyushu's shares trade at six times EBITDA despite a balance sheet with net cash.^1,2 The valuation discount is even more pronounced when considering nearly half of the Company's EBITDA is derived from high-quality real estate, a contribution amongst the highest in its peer group.^1,2 Fir Tree estimates that JR Kyushu's cash-generating real estate alone is worth more than the current market capitalization. The Fund believes the Company's shares could double in value.

Fir Tree fully supports JR Kyushu management and believes they can close the large valuation gap through an improved capital structure and a strong management incentive plan.

Capital Structure

Fir Tree believes in the current low interest rate environment a capital structure with no net debt is inefficient and results in an artificially low return on equity (ROE).  Given significant balance sheet capacity, the Fund believes the most effective and immediate means of closing the valuation gap would be for the Company to issue debt in order to buy back its shares.  With the stock trading at six times EBITDA and 11 times P/E, a buyback would be one of the highest return investments the Company could make.  JR Kyushu could buy back 24 million shares (15% of outstanding), and net debt would still remain at a very low level of 0.3 times EBITDA compared to its rail peers' average Net Debt to EBITDA of 4.8 times.^1,2

Buying back stock at such a large discount would not only be very accretive to earnings per share and ROE, it would also lower the firm's overall cost of capital, according to Fir Tree.  As a result, a share buyback would fit squarely into the principles of Japan's Corporate Governance Code.  Fir Tree recommends a share buyback of at least 15% of outstanding shares to be implemented within the first year of JR Kyushu's upcoming 2019-2021 'Medium-Term Business Plan.'

Goal Alignment

Although JR Kyushu became a public company more than two years ago, senior management and board ownership of the stock remains at less than 0.01% of outstanding shares.  In line with Japan's Corporate Governance Code, Fir Tree strongly believes that management's compensation should include incentives that reflect the medium to long-term results of the business. 

To better align management with shareholder goals Fir Tree suggests JR Kyushu institute a management stock remuneration plan.  By doing so, the Company can improve its overall governance and reassure investors of their mutual objectives.  The Fund recommends the Company propose a management stock compensation plan to investors ahead of the next annual general meeting in June 2019.

About Fir Tree Partners

Fir Tree Partners, founded in 1994 and located in New York City (HQ) and Miami, is a value-oriented investment manager that invests on behalf of endowments, charitable and philanthropic foundations, pension funds and other institutional and private investors.  The firm has successfully applied its opportunistic approach across a wide array of asset classes, industries and geographies, including in Japan where it has been actively investing for nearly a decade.  Fir Tree Partners has adopted Japan's Stewardship Code.

For more information contact:

In US:
Scott Tagliarino / Taylor Ingraham
ASC Advisors
203-992-1230
[email protected] / [email protected] 

In Japan:
Dan Underwood / Brendan Jennings
Ashton Consulting
+81 3 5425-7220
[email protected]

1. Comparable companies: East Japan Railway, West Japan Railway, Central Japan Railway, Hankyu Hanshin Holdings, Odakyu Electric Railway, Seibu Holdings, Tobu Railway, Keio Corp.
2. Sources: Bloomberg, JR Kyushu and comparables' public financials.

SOURCE Fir Tree Partners